As the economy evolves, certain areas expand faster than average while others dwindle. Which would you consider the technology sector? It’s growing rapidly, of course. Corporations that compete in these sectors must emerge as one of the leaders because markets only have room for a few companies. What do we mean? Can you name the number 3 Internet search engine? The third most popular cell phone operating system?

So, how do corporations give themselves the best chance to emerge and maintain their positions as leaders in expanding markets? They often “plow back” any profits into the business to grow it as fast as possible. As a result, growth companies pay little or no dividends. How can we tell if a company is growing rapidly? It would be helpful to know that the average revenue growth rate of an S&P 500 company is around 3% to 4%. Any rate appreciably higher than this would qualify a corporation as a growth stock.

Suitable for Younger investors (who have the luxury of time to make up for losses) who want to take greater risks to build their wealth at a fast pace, or just ordinary investors who want to take a small portion of their wealth and aggressively invest it.
Examples Workday (WDAY), Netflix (NFLX), Tesla (TSLA).
In the news Twilio and Stripe are seeing explosive growth in 2020, highlighting a major software industry trend – November 14, 2020

Cloud Software Is Booming — Just Ask Workday and Salesforce – September 1, 2017

Netflix Jump in New Users Fuels After-Hours Stock Surge – October 17, 2016

Why Wal-Mart Can’t Grow Anymore – February 28, 2016
Connections Growth corporations are the opposite of income corporations. They are less risky than emerging growth corporations whose markets are less assured.
Explorations
  1. Find the last three years of Income Statements for Apple and Google. Record their annual sales and net income in a table and then compute the rate of growth between years using the formula: 100 * (New sales – Prior year sales) / Prior year sales. How has the rate of growth changed?
  2. Technology is advancing rapidly, providing many opportunities for growth. It’s not a coincidence that most of the well-known growth corporations are “tech” stocks. Find rapidly growing corporations that are outside of the technology sector and explain what is allowing them to grow rapidly.
  3. Having little room at the top means that many growth stocks fail. Can you identify a “falling star”, a corporation that was unable to stay on top?
A final word

 

 The problem with growth is that corporations become victims of their own success. They get so big that to add a significant percentage to their sales and profits becomes more difficult with each passing year. For example, for a corporation with $10 million in annual sales to grow 20%, it has to find customers to purchase an additional $2 million worth of products.  For a corporation with $100 billion in sales to achieve the same growth rate, it has to find customers to purchase an additional $20 billion in products!

Even the most successful corporations eventually hit the wall, no longer able to find large market opportunities to pursue. When this happens, they start piling up profits. Eventually, their cash pile gets embarrassingly large and they are pressured by their shareholders to begin paying a steady dividend. This decision represents the end of an era because it is an admission that the corporation is no longer the growth star it may have been for decades. A classic case is Microsoft, which began paying a quarterly dividend in 2003. A more recent example is Apple, which in 2012 began paying a regular dividend.