Growth Company

What Is a Growth Company?

Understanding a Growth Company

Growth companies have characterized the technology industry. The quintessential example of a growth company is Google, which has grown revenues, cash flows, and earnings substantially since its initial public offering (IPO).

Growth companies such as Google are expected to increase their profits markedly in the future; thus, the market bids up their share prices to high valuations. This contrasts with mature companies, such as utility companies, which tend to report stable earnings with little to no growth.

Growth Companies During Bull and Bear Markets

During bull markets, growth stocks are preferred and tend to outperform value stocks because of environmental risk and the perceived low risk in the markets. However, growth stocks tend to underperform value stocks during bear markets because weak economic activity hinders sales growth and the growth engine that drives the stocks higher.

Mature companies tend to weather bear markets better than growth companies as they are firmly rooted within their industry, have a dedicated consumer base, are well-known, and have stronger financials, such as larger cash reserves to ride out the poor performing economy.

Mature companies also have an easier time raising capital in difficult economic times because of the fact that they are established and their credit is proven; growth companies often have less established financials so obtaining a loan, for example, may be more difficult. This is why growth companies often receive capital from venture capital firms or angel investors. This additional capital can be imperative to helping some growth companies survive an economic downturn.

Real World Examples

The vast majority of growth companies reside in the technology sector where rapid innovation and growth spending is typical. Google (GOOGL), Tesla (TSLA), and Amazon (AMZN) are three classic examples of growth companies because they continue to focus on investing in innovative technologies, sales growth, and expansion into new businesses.

That being said, these three companies are also now fairly established within their industries and are considered solid investments that have very different characteristics from when they started out as small companies years ago. Many growth companies exist in different sectors, one being Etsy (ETSY), the e-commerce retail platform that sells a large array of vintage and craft items.