Growth Investing

Example of a Growth Stock

Amazon Inc. (AMZN) has long been considered a growth stock. In 2021, it remains one of the largest companies in the world and has been for some time. As of Q1 2021, Amazon ranks in the top three U.S. stocks in terms of its market capitalization.

Amazon’s stock has historically traded at a high price to earnings (P/E) ratio. Between 2019 and early 2020, the stock’s P/E has remained upwards of 70, moderating to around 60 in 2021. Despite the company’s size, earnings per share (EPS) growth estimates for the next five years still hover near 30% per year.

When a company is expected to grow, investors remain willing to invest (even at a high P/E ratio). This is because several years down the road the current stock price may look cheap in hindsight. The risk is that growth doesn’t continue as expected. Investors have paid a high price expecting one thing, and not getting it. In such cases, a growth stock’s price can fall dramatically.

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