Growth Stock
A growth stock is one expected to grow earnings faster than the market average.
Growth stocks are typically valued on future earnings potential rather than current profits, which often results in high P/E ratios or no P/E at all for pre-profit companies. Technology, biotechnology and consumer internet have been the dominant growth sectors in recent decades.
The defining tension in growth investing is the discount rate: future earnings are worth less in present-value terms when interest rates rise, which is why growth stocks typically fall harder than value stocks in rate-rising environments.
The classic hallmarks of a growth stock: revenue growth above 20% per year, expanding gross margins, large addressable market, and a durable competitive moat.
Further Reading
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