Hey everyone, I am going to try and explain how growth stocks can create and destroy value for shareholders. This post is mainly directed toward beginners who can get caught up in the hype of growth stocks and hopefully this post will help recognise the importance on focusing on the fundamentals. I hope you enjoy the read.

According to the Motley Fool, a growth stock is 'a company that is expected to grow its profit and revenues faster than the general market'. Based on that description, it is very understandable why some investors seek out growth stocks. But, growth stocks can be very misleading. I will present two companies. Shopify and Pool Corporation.

Shopify:

Shopify is one of the fastest growing companies. Look below at the growth in revenue:

Revenue (In 000's)

Revenue increased by $5,494,846 (In 000's) in nominal terms. However, below it appears that total expenses grew at a faster rate then revenue.

Total Expenses (In 000's)

Total expenses increased by $6,295,530 (In 000's) in nominal terms. That exceeded the growth in revenue.

Losses from operations also increased. This due to expenses outpacing revenue.

Loss from operations increased 3704%. Now, it is true that Shopify is a “growth” stock. The company is growing, but it is growing at the EXPENSE of shareholders. Let's take a look at the total amount of shares between the two periods.

Shares outstanding (In 000's)

Shares outstanding increased by 3151%

As we can see, Shopify has been selling more shares to public shareholders in order to keep running its money losing operations. This is a growing company that is destroying value for shareholders.

Let's now take a look at Pool Corp…

Pool Corporation:

Pool Corp is another growing company. Let's look at revenue below:

Revenue (In 000's)

Revenue increased $3,933,165 in nominal terms.

Total Expenses:

Expenses increased by $3,095,647 in nominal terms. Noticed how expenses grew at a much slower rate the revenue. How does this affect profitability and margins? Let's take a look below…

Profitability (In 000's)

Operating Income Increased 443%.

Profit margins:

Profit margins are telling that in 2014, every $1 of revenue has generated 8c in profit and in 2022, $1 in revenue has generated 16c in profit. Because of the Profitable growth in the business, Pool Corp has created value for shareholders and has returned cash to shareholders in the form of buybacks and minor dividends.

Shares outstanding (In 000's)

Shares outstanding has decreased by 12.4%, a huge difference compared to the 3151% increased for Shopify.

Conclusion:

Both Shopify and Pool Corporation are growth companies. However, Shopify has grown at the expense of shareholders whereas Pool Corp has grown internally and thus has created value for shareholders. I hope you have gained some value!