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Ever been in a situation where something — maybe the last piece of amazing chocolate triple-layer cake at a crowded party— was there for the taking? You knew that if you didn't grab it, and soon, someone else would.
Some companies find themselves operating in markets that have so much potential for new products. If they don't get these new products out soon, a competitor will. A great example is the mobile phone and computing market.
Growth companies have made it their priority to grow their sales and profits rapidly. When those profits are made, they're "plowed back" into new product development. As a result, growth companies pay little or no dividends.
How can we tell if a company is growing rapidly? Generally, if its sales and profits are growing 12% to 15% or more per year, we can consider it a growth corporation.
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Suitable for
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Younger investors (who have the luxury of time) who want to take greater risks to build their wealth at a faster pace.
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Examples
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Apple (AAPL), Google (GOOG), Salesforce (CRM).
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In the news
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A Big Miss by Salesforce - November 19, 2011
Apple Records Q4 2011 Earnings of $6.6B on $28.3B in Revenue, Tops $100 Billion in Sales for Fiscal 2011 - October 18, 2011
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Connections
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Growth corporations are the opposite of income corporations.
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Explorations
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Find the last three years of Income Statements for Apple, Google and/or any other high-flying corporation. Record their annual sales and net income in a table and then compute the rate of growth between years. How has the rate of growth changed?
Because technology is advancing so rapidly, most of the well-known growth corporations are "tech stocks". Can you find rapidly growing corporations that are outside of technology?
Not all growth corporations can stay on top, especially in the face of fierce competition. Can you identify any "falling stars", corporations that were unable to stay on top? (Hint: Start with Research in Motion (RIMM), the maker of the Blackberry line of mobile phones.)
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A final word
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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 $100 million in annual sales to grow 20%, it has to find customers to purchase another $20 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 another $20 billion in products!
In light of this, the success Apple and Google have achieved over the last several years is just mind-blowing. They are massive corporations who are breaking all the rules by growing rapidly!
Finally, 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 (because they're not spending as much money to enter new markets with new products). 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. Watch for Google and Apple to begin paying a regular dividend.
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