Growth Firm

What Is a Growth Firm?

In finance, the term “growth firm” refers to a company that has a track record of unusually rapid growth as compared to its industry competitors. Although this term is widely used in financial media, commentators will often differ in their exact usage of the term.

Growth firms are often among the most popular and widely discussed companies in the financial markets, occasionally attracting controversial debates between those who are bullish or bearish about the company’s continued prospects.

How Growth Firms Work

Although various definitions of a growth firm exist, most investors would agree that they are companies that have grown an important underlying metric at a pace significantly greater than their industry average. Typically, references to a company’s “growth” will refer to financial metrics such as its revenues, assets, or market share. In other cases, however, the term can refer to non-financial measures, such as the size of its active user-base or the speed of its production processes.

Growth firms are typically engaged in relatively new industries in which there are few if any dominant players. In these circumstances, such as when Internet companies were first becoming established in the 1990s, companies can sometimes gain rapid increases to their market share, either because of superior product offerings or marketing campaigns or simply due to having benefited from a first-mover’s advantage.

In time, however, these same companies may fail to secure lasting competitive advantages that would protect them from increased competition. Under these circumstances, a growth firm that may have previously seemed invincible could see its market share gradually eroded by new entrants to the industry.

Growth Firm Example

One recent example of a growth firm is Elon Musk’s Tesla (TSLA). The company has demonstrated dramatic growth in recent years. To begin with, revenue increased at a compound annual growth rate (CAGR) of over 60% between 2013 and 2018 — from just over $2 billion in 2013 to over $21 billion in 2018. By contrast, its two major American competitors, General Motors (GM) and Ford Motor Company (F) achieved CAGRs of -1.1% and 1.8% over this same timeframe. 

Similar results have been shown in regard to the company’s balance sheet, with book value per share increasing from $2.18 on year-end 2010 to $33.51 as of September 30th, 2019. Unsurprisingly, this rapid growth has been met with a similarly stark increase in Tesla’s market capitalization, which grew from about $25 billion in January 2015 to over $100 billion as of January 2020.

Of course, as is true for many growth firms, the question of whether Tesla’s past growth can be sustained into the is the subject of active debate by investors. In the case of Tesla, this debate has been especially animated, in part because of the significant short interest in the company’s shares. For investors who choose to bet against growth firms, the prospect of that growth continuing for long periods of time can be a frightening one indeed — one that can lead to potentially costly short squeezes or margin calls.