What Is a Growth Industry?
Let me tell you directly: a growth industry is that part of the economy where growth outpaces the average across other sectors. These are often emerging fields that didn't even exist before, fueled by fresh demand for innovative products or services from companies in the space. Take the technology sector as a prime example—its products have exploded in popularity, driving tech firms to massive valuations on the stock market.
Understanding Growth Industries
You need to grasp the drivers behind these industries. One key factor is the rise of new technologies that inspire entrepreneurs and startups to create related products and services. Technology evolves constantly, so investing here bets on explosive future growth.
Consider the smartphone industry—it combined multiple tech innovations into one device and became a growth powerhouse earlier this decade. More recently, virtual reality (VR) and machine learning fit this mold. VR creates immersive, computer-simulated experiences with uses in gaming headsets, driving simulations, and medical training.
Big data handles massive data volumes for research, trend spotting, and predictions. Companies in this area serve big clients in fields like healthcare, and as the tech gains traction, startups multiply. Investors price these firms based on current earnings plus projected growth.
Regulatory changes can also ignite growth. In healthcare, shifts in insurance rules drive expansion. Deregulating electricity markets and rising sustainability awareness have funneled investments into solar and renewable energy stocks. Medical marijuana emerged as a growth industry thanks to loosened laws.
Look at Tesla Inc. (TSLA)—it boasts one of the highest valuations among automakers, thanks to regulatory tailwinds and cutting-edge tech. Investors are drawn to its vision of a greener future and advanced vehicles.
Finally, lifestyle and consumer preference shifts play a role. With more free time, tech, and travel options, people are traveling more, leading to a boom in travel apps and sites. Startups like Airbnb and Uber have achieved sky-high valuations in private markets and are eyed for public offerings.
Key Takeaways
Here's what you should remember: growth industries are economic sectors with above-average growth from new tech, societal shifts, or regulations. Their stocks can be volatile and risky, but they often come with media buzz and rising sales. Analysts rely on CAGR to evaluate them.
Characteristics of Growth Industries
These industries share traits like consistent, rapid sales growth across companies and a surge in investments, often with plenty of media hype. Stocks here tend to be volatile and risky, but investors accept that for potential big returns.
Other risks include high cash burn rates, no profits despite excitement, market bubbles, and tech hurdles that can stall progress.
Growth Industries and CAGR
Many analysts turn to the compound annual growth rate (CAGR) to gauge an investment's current strength and future promise. CAGR measures the average annual growth over a period longer than a year, applicable to both growth and standard industries.
To calculate it, divide the ending value by the beginning value, raise to the power of one over the number of years, then subtract one: CAGR = (Ending Value / Beginning Value)^(1 / # of years) - 1.
CAGR smooths out inconsistent growth—for instance, if an investment grows 6% one year, drops 3% the next, and rises 2% after that, it gives a broader view. But it ignores things like market volatility.
Example of a Growth Industry
The marijuana industry stands out as a recent growth example. Once stigmatized and tightly regulated, it's shifted in the last decade due to public support prompting lawmakers to ease restrictions. As of August 2022, 37 states allow medical marijuana, and 19 have legalized it fully.
Universities are researching its medical uses, like New York University treating veterans with PTSD. Food and beverage companies are adding marijuana compounds to products. Investors are funding these firms, expecting strong future growth.
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