Do growth companies always mean good returns?

Where will the next Amazon, Apple or Nvidia come from? That’s the billion-dollar question and one that most investors would love to know the answer to. The rapid expansion of these and other growth companies over recent years has driven huge increases in US equity markets. One of their key characteristics is high earnings growth, especially in their early years. As an example, between 2014-2024, Amazon converted a loss of US$ 241 million into a profit of US$ 59 billion¹. Over the same period, Apple’s earnings accelerated from US$ 39.5 billion to US$ 94 billion².

Innovation and market dominance

Successful growth companies need to either offer something new or provide existing products at a cheaper price. Tech giant Nvidia is arguably the most well-known example of a growth company in recent years. The company designs and manufactures powerful micro-chips for a broad range of fast-growing industry sectors such as data centres, AI and robotics. And the transformative uses of AI are attracting many more new entrants to the market, large and small.

Yet AI isn’t the only story in town. In 2024, Danish pharmaceutical company Novo Nordisk was briefly the most valuable company in Europe³. It enjoyed a more than three-fold increase in its share price between 2021-2024 thanks to the success of diabetes and weight-loss drugs Ozempic and Wegovy.⁴

Beware of the (non) dividend

When starting out, most potential growth companies will not be profitable. They will rely on borrowing and external investment to grow. Rather than paying dividends, management’s focus will typically be on strengthening innovation and technological edge and increasing sales. Even when successful, growth companies will usually only pay a small dividend, at best. On the upside? Investors will normally be rewarded with a much higher share price.

Success in scaling up

A further trait of growth companies is the need to ‘scale up’. Prioritising the product range means that, once this is in place, the business can expand and start to make a regular profit. For example, once code for a new chip has been written, it can be replicated cheaply. Nvidia’s operating profit margin (the company’s sales divided by the cost of producing those sales, such as salaries, raw materials and overheads) was a staggering 61% in the three months to July 2025. By comparison, the equivalent figure for auto manufacturer General Motors was 3.8%⁵.

Growth companies don’t need to be tech-focused or even listed. Privately-held UK sports clothing maker Gymshark was founded in 2012. It took two months before it received an order on its website. Yet by 2024 it had generated annual sales of £607 million and profits of £11.9 million⁶. Its success to-date reflects its ability to scale and adapt to changing market demands.

Sales growth is no guarantee of success

The adjustment necessary as a company shifts from generating strong sales to targeting profitable sales is not easy. Generating the former without the latter causes the failure of many growth-type companies. It is not enough to have a great idea – growth companies must be able to convert their sales into cash earnings too.

Take flexible office space company WeWork. It was once the world’s most valuable start-up, worth $47 billion at its peak⁷. Following the pandemic, its market shrank as people spent more time working from home. Yet the company was still committed to expensive leases. Its value shrank by more than 90% by the time it went bankrupt in 2023. Exercise bike manufacturer Peleton is another example of a company that struggled once the pandemic was over and people returned to their gyms. The company failed to adapt once its captive market disappeared.

Despite telling good stories, these companies failed because they overestimated the strength of their potential market. Moving into new markets (WeWork) or new products (Peleton) before strengthening their key product damaged their viability.

Yet for successful growth companies, the rewards can be substantial. While Amazon still dominates online shopping, it has used its scale and expertise to grow in other areas. For example, its Amazon Web Services (AWS) provides the infrastructure that supports many governments and businesses. Such is its importance world-wide, a temporary global outage in October made global headlines.

Watch out for the slowdown

Growth companies can provide an attractive counter-balance to more mature businesses, not least as part of a diversified portfolio. But the potential for higher returns means a higher level of risk. When growth companies no longer meet market expectations on their future prospects, they become ‘ex-growth’. The accompanying downgrade in valuation can be swift.

As well as a strong business model, many successful growth businesses have dynamic leadership. Apple’s Steve Jobs, Jensen Huang at Nvidia as well as Elon Musk of Tesla and SpaceX and Jack Ma at Alibaba – these are all business leaders who have nurtured their companies through initial high growth phases and come out the other side.

Investors should remember that the best growth companies (must) evolve. Eventually, gravity takes hold. Even the fastest growth companies will slow unless they can adapt and innovate.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

Sources
^1-7Bloomberg - as at 12 November 2025