What you’re describing is called a Growth Stock as opposed to a Mature Stock. I heard these terms recently when reading about the AI bubble and will just quote the relevant parts, because the author describes it better than I ever could:
Pluralistic: The Reverse Centaur’s Guide to Criticizing AI from Cory Doctorow
*You see, when a company is growing, it is a “growth stock,” and investors really like growth stocks. When you buy a share in a growth stock, you’re making a bet that it will continue to grow. So growth stocks trade at a huge multiple of their earnings. This is called the “price to earnings ratio” or “P/E ratio.”
But once a company stops growing, it is a “mature” stock, and it trades at a much lower P/E ratio. So for every dollar that Target – a mature company – brings in, it is worth ten dollars. It has a P/E ratio of 10, while Amazon has a P/E ratio of 36, which means that for every dollar Amazon brings in, the market values it at $36.
It’s wonderful to run a company that’s got a growth stock. Your shares are as good as money. If you want to buy another company, or hire a key worker, you can offer stock instead of cash. And stock is very easy for companies to get, because shares are manufactured right there on the premises, all you have to do is type some zeroes into a spreadsheet, while dollars are much harder to come by. A company can only get dollars from customers or creditors.
So when Amazon bids against Target for a key acquisition, or a key hire, Amazon can bid with shares they make by typing zeroes into a spreadsheet, and Target can only bid with dollars they get from selling stuff to us, or taking out loans, which is why Amazon generally wins those bidding wars.
That’s the upside of having a growth stock. But here’s the downside: eventually a company has to stop growing. Like, say you get a 90% market share in your sector, how are you gonna grow?
Once the market decides that you aren’t a growth stock, once you become mature, your stock is revalued, to a P/E ratio befitting a mature stock.
If you are an exec at a dominant company with a growth stock, you have to live in constant fear that the market will decide that you’re not likely to grow any further. Think of what happened to Facebook in the first quarter of 2022. They told investors that they experienced slightly slower growth in the USA than they had anticipated, and investors panicked. They staged a one-day, $240B sell off. A quarter-trillion dollars in 24 hours! At the time, it was the largest, most precipitous drop in corporate valuation in human history.
That’s a monopolist’s worst nightmare, because once you’re presiding over a “mature” firm, the key employees you’ve been compensating with stock, experience a precipitous pay-drop and bolt for the exits, so you lose the people who might help you grow again, and you can only hire their replacements with dollars. With dollars, not shares.
And the same goes for acquiring companies that might help you grow, because they, too, are going to expect money, not stock. This is the paradox of the growth stock. While you are growing to domination, the market loves you, but once you achieve dominance, the market lops 75% or more off your value in a single stroke if they don’t trust your pricing power.
Which is why growth stock companies are always desperately pumping up one bubble or another, spending billions to hype the pivot to video, or cryptocurrency, or NFTs, or Metaverse, or AI.*
