Growth Stock
A share of a company expected to grow revenue and earnings significantly faster than the market average, typically trading at elevated valuations.
What is Growth Stock?
A growth stock is a share of a company whose revenue, earnings, or cash flows are expected to expand at an above-average rate compared to the broader market. Growth companies typically reinvest most or all of their profits into business expansion rather than paying dividends, prioritizing future scale over current income. Because investors pay for future earnings potential, growth stocks often trade at high price-to-earnings and price-to-sales multiples. Technology, biotechnology, and software sectors are traditional growth stock hunting grounds. Growth stocks outperform in low-interest-rate environments but are more vulnerable to rate increases, which reduce the present value of future cash flows.
Example
Nvidia's stock price increased more than 200% in 2023 as investors priced in explosive revenue growth from its GPU chips powering AI data centers. With a forward P/E ratio exceeding 35x at year-end, the market was paying a significant growth premium — reflecting expectations that Nvidia would compound earnings at a high rate for years to come rather than its current earnings power.
Source: Investopedia — Growth Stock