Growth: Why the Future Matters
When you buy a stock, you're not just buying today's earnings—you're buying all future earnings too. That's why growth is so important.
The Growth Premium
Two companies, both earning $1 per share:
| Company | Current EPS | Growth Rate | EPS in 5 Years |
|---|---|---|---|
| Slow Corp | $1.00 | 5%/year | $1.28 |
| Fast Corp | $1.00 | 20%/year | $2.49 |
Same starting point, but Fast Corp will earn nearly 2x more in just 5 years. Which would you pay more for today?
This is why investors pay higher P/E ratios for faster-growing companies.
The Two Rental Properties
Imagine two rental properties, both generating $1,000/month rent today:
- Property A: In a declining neighborhood. Rent will probably stay flat or decrease.
- Property B: In a booming area. Rent will likely increase 10% per year.
You'd pay more for Property B, right? Same logic applies to stocks. Growth potential commands a premium price.
Types of Growth
Revenue Growth
What it is: Increase in total sales
Why it matters: Shows the company is selling more products/services
Watch for: Is it sustainable? Organic or from acquisitions?
Earnings Growth
What it is: Increase in profits
Why it matters: This is what shareholders ultimately care about
Watch for: Is it from revenue growth or just cost-cutting?
Dividend Growth
What it is: Increase in cash payments to shareholders
Why it matters: Growing dividends = growing income stream
Watch for: Is it sustainable? What's the payout ratio?
Key Takeaways
- Growth companies can turn small earnings into large earnings over time
- Investors pay premium P/E ratios for faster growth
- Both revenue growth and earnings growth matter
The Growth vs. Value Debate
Investors often fall into two camps:
Growth Investors
- Buy fast-growing companies
- Accept higher P/E ratios
- Bet on future potential
- Examples: Amazon, Tesla, Nvidia in their growth phases
Value Investors
- Buy undervalued companies
- Seek lower P/E ratios
- Focus on current fundamentals
- Examples: Banks, utilities, mature industrials
The truth: The best investments often combine both—quality companies with good growth at reasonable prices. That's what ShareValue.ai helps you find.
How to Evaluate Growth
1. Historical Growth
Look at the past 3-5 years:
- Revenue growth rate
- Earnings growth rate
- Consistency (steady or erratic?)
2. Future Growth Potential
Consider:
- Market size (room to grow?)
- Competitive position (can they capture growth?)
- Industry trends (tailwinds or headwinds?)
3. Growth Quality
Ask:
- Is growth profitable? (Some companies grow revenue but lose money)
- Is it sustainable? (Or a one-time boost?)
- Is it capital-efficient? (Growing without massive spending?)
The Rule of 72 for Growth
Remember the Rule of 72? It works for company growth too:
- 10% growth = doubles in ~7 years
- 15% growth = doubles in ~5 years
- 20% growth = doubles in ~3.5 years
- 25% growth = doubles in ~3 years
Growth Traps to Avoid
1. Paying Too Much for Growth
A company growing 20% isn't worth ANY price. Growth has to be worth what you pay.
2. Assuming Growth Continues Forever
Most high-growth companies slow down eventually. Trees don't grow to the sky.
3. Ignoring Profitability
Revenue growth without profit growth is just burning cash. Eventually, companies need to make money.
4. Chasing Hot Sectors
Just because AI or crypto is hot doesn't mean every company in the space will succeed.
Growth Investing Mistakes
- Buying a stock just because it's "growing fast"
- Ignoring valuation because "it's a growth stock"
- Extrapolating recent growth rates indefinitely
- Confusing revenue growth with earnings growth
ShareValue.ai's Growth Score
Our Growth Score evaluates:
- Revenue growth trends
- Earnings growth trends
- Consistency of growth
- Sustainability indicators
Combined with Valuation Score, you can find growth at a reasonable price—the sweet spot.
Next up: What separates good businesses from bad ones? Let's explore quality.