What Is a Growth Stock? Examples and Growth vs. Value Stocks
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
A growth stock is a share in a company expected to grow revenue and earnings faster than the market, usually paying little or no dividend and returning value through price gains.
Key takeaways
- Investors measure growth with YoY revenue and EPS growth, multi-year CAGR, forward estimates and the PEG ratio.
- A PEG near 1 is a common rule of thumb for a fair price, but it depends on an accurate growth estimate.
- A company growing 20% a year can still disappoint investors if buyers had priced in 35% growth.
- Rising interest rates can hit growth stocks harder because much of their value rests on distant earnings.
A growth stock is a share in a company that investors expect to increase its revenue and earnings faster than the average company in the market. Growth companies usually pay little or no dividend. They reinvest profits to expand, so shareholders expect to make money mainly through capital gains when the share price rises. Because buyers are paying for results that have not happened yet, growth stocks tend to trade at high valuations and can fall sharply when those results fail to arrive.
What Is a Growth Stock?
“Growth” describes what the market expects from the business. A company qualifies when its revenue and earnings are projected to rise significantly faster than those of the overall market, for example faster than the typical company in the S&P 500. The label is about the future, which is why two companies with the same current profits can be classified differently.
Growth stocks can be found in any sector and on any exchange, though they cluster in fast-expanding industries such as technology, software and biotech, and many are listed on the Nasdaq. Many are small-cap companies with a short operating history, but size does not disqualify a company. A very large business can still be a growth stock if its earnings keep expanding faster than the market’s.
Companies that earn this label often share some traits:
- A distinctive product or technology, sometimes protected by patents, that puts them ahead of rivals.
- Heavy reinvestment in research, new products, sales capacity or acquisitions to stay ahead.
- Expanding market share or a loyal customer base built by being first or best in a new category.
- Low or no dividend payout, because cash retained in the business is expected to earn more than shareholders could earn elsewhere.
A hypothetical app developer that launches a new service before anyone else can become a growth stock by capturing users quickly. If competitors copy the service, the company that attracts and keeps the most users is the one most likely to keep growing at an above-market rate.
How a Growth Stock Works
Calculating growth stock metrics
There is no single official formula that turns a company into a growth stock. Investors measure growth with a few standard metrics and compare them to the market or to peers:
- Revenue growth, usually measured year over year (YoY): (current-period revenue ÷ prior-period revenue) − 1.
- Earnings growth, usually earnings per share (EPS) growth, calculated the same way.
- Multi-year growth rate, often a compound annual growth rate (CAGR): (ending value ÷ starting value)^(1 ÷ years) − 1. This smooths out a single unusually strong or weak year.
- Forward estimates, analysts’ projected revenue and EPS growth for coming years, which carry the expectations the price is built on.
- Valuation relative to growth, most often the PEG ratio: P/E ÷ expected annual EPS growth rate (in percent).
A stock screener can filter for these figures, such as revenue growth above a chosen threshold and positive EPS growth over several years.
Worked example (hypothetical)
Assume Company G trades at $100 per share and earned $2.00 per share over the past year. Its P/E is 100 ÷ 2 = 50, far above a typical market multiple. Analysts expect EPS to grow 25% per year for five years.
- EPS after five years: $2.00 × 1.25^5 ≈ $2.00 × 3.05 = $6.10.
- If the price stayed at $100, the P/E on year-five earnings would be 100 ÷ 6.10 ≈ 16.4.
- PEG today: 50 ÷ 25 = 2.0.
This is how a growth stock can look expensive today and cheap later. Buyers at $100 are betting that the earnings will catch up with the price. If growth comes in at 10% per year instead, EPS reaches only about $3.22, and the stock still trades at about 31 times those later earnings. Investors who reprice it to a lower multiple would push the share price down even though the company kept growing.
Interpreting a growth stock
The numbers mean little in isolation. A 15% revenue growth rate is strong for a mature retailer and weak for a young software company. Investors usually look at:
- Consistency: steady growth over several years carries more weight than one spike.
- Quality of growth: revenue growth that also lifts margins and cash flow is stronger than growth bought with discounts or heavy losses.
- Runway: how large the potential market is relative to the company’s current sales.
- Price paid: a high P/E or PEG means more of the future is already priced in.
Some investors treat a PEG near 1 as a reasonable price for growth, but it is a rule of thumb, and the ratio depends entirely on how accurate the growth estimate is.
Growth Stocks vs. Value Stocks
Growth and value are the two main investment styles, and most stocks are discussed in relation to them.
| Growth stocks | Value stocks | |
|---|---|---|
| What investors buy | Expected future expansion | A price below estimated worth |
| Typical P/E and P/B | High | Low |
| Dividends | Low or none | Often above average |
| Main source of return | Capital gains | Price recovery plus dividends |
| Typical company | Younger, innovative, reinvesting | Older, established, slower-growing |
| Main risk | Growth disappoints | The low price is deserved |
A value stock is one the market appears to underrate. It may be cheap because of a weak earnings report, negative news or simply because it operates in an unexciting industry. Value investors expect the price to rise toward the company’s fundamentals and collect dividends while they wait.
How to tell whether a stock is growth or value: compare its P/E, price-to-book (P/B) ratio and dividend yield with the market and its sector, and look at its historical and projected growth rates. High multiples, little or no dividend and fast expected earnings growth point to growth. Low multiples, above-average yield and modest growth point to value. Index providers that build growth and value style indexes score each company on several such factors, and a stock can be split between both indexes when its profile is mixed.
Some investors hold both styles for diversification, since the two have tended to lead the market at different times. Others concentrate on one.
Example of a Growth Stock
Amazon (AMZN) is a widely cited example of a large-cap growth stock. Despite being one of the world’s largest companies, it has been valued partly on expectations that its e-commerce, cloud computing, advertising and AI-related businesses will keep expanding earnings, and its stock has often traded at a higher P/E than the broader market.
Its annual report filed with the SEC shows net sales of $716.9 billion in 2025, up from $638.0 billion in 2024, and diluted EPS of $7.17, up from $5.53. Applying the YoY formula:
- Sales growth: 716.9 ÷ 638.0 − 1 ≈ 12.4%
- Diluted EPS growth: 7.17 ÷ 5.53 − 1 ≈ 29.7%
Earnings growing more than twice as fast as sales indicates expanding profitability, the kind of result investors look for when they pay a premium multiple.
A smaller hypothetical case shows the other end of the spectrum. A biotech startup has a promising cancer treatment in Phase I clinical trials and no product revenue. If the drug passes later trials and gains FDA approval, profits and capital gains could be large. If it fails or causes severe side effects, the research spending may produce nothing, and the stock may never reach the value investors priced in.
Limitations of a Growth Stock
Valuation risk. Because the price reflects expectations, growth stocks can decline steeply on a modest miss. A company can grow 20% a year and still be a poor investment if buyers had priced in 35%.
No income cushion. With little or no dividend, the only way to earn a return is to sell at a higher price. If the company struggles, there is no payout to offset losses.
Sensitivity to interest rates. Much of a growth company’s estimated value comes from earnings expected many years out. Analysts describe this as a long equity duration. When interest rates rise, those distant earnings are discounted more heavily, which can pressure growth stock prices more than those of companies whose value rests on current profits.
Forecast error. Growth rates rarely stay high indefinitely. Competition, market saturation and execution problems slow most fast-growing companies eventually, and estimates can be wrong in either direction.
Volatility. Higher potential return comes with larger price swings than value stocks or corporate bonds, which matters for investors who may need to sell on short notice.
FAQs
Can a growth stock become a value stock?
Yes. As a company matures, its growth rate typically slows, it may start paying dividends and its P/E often compresses. A stock can also move toward value status quickly if a sharp price decline leaves it trading at low multiples.
The Bottom Line
Growth stocks suit investors who can accept large price swings and no dividend income while waiting for earnings to catch up with a high valuation. Before buying, compare the company's growth consistency, quality and runway against the multiple you pay. Since the return depends on selling higher, a growth slowdown or higher rates can cause losses even when the business keeps expanding.
