Growth stocks have been a great addition to my investment portfolio these past few years. In fact, my wealth has increased considerably thanks to these businesses. But often, their strong performance is a direct result of investor expectations (including my own). As a result, these companies can end up carrying pretty lofty valuations that can result in quite a lot of volatility. Therefore, I believe careful and regular scrutiny of growth stocks is necessary to keep my portfolio heading in the right direction.

Key characteristics of growth stocks

From what I’ve seen over the years, growth stocks have a few key characteristics. First and foremost, they grow considerably. It’s not unusual to see double-digit growth in revenues and profits. What’s more, they very rarely pay out dividends. Instead, the management team reinvests the generated cash flow back into operations to fuel more growth.

Naturally, seeing double-digit growth of income can lead to some substantial expectations moving forward. And that’s what pushes up the share price. But if these expectations aren’t met, then it’s quite common to see the growth stocks take quite a large hit. That’s why they are generally a riskier form of investment.

Which growth stocks am I looking at?

The post-pandemic era has transformed the way businesses are conducted. Changing consumer habits have allowed several companies to reach new heights in quite a short space of time. And one business that has flourished is Shopify (NYSE:SHOP). 

This e-commerce company empowers businesses to set up an online storefront exceptionally quickly and without much hassle. With ecommerce being the go-to shopping solution for non-essential items since 2020 due to the pandemic, the demand for Shopify’s platform exploded.

With sales skyrocketing, the share price followed suit. At the start of last year, Shopify was trading at a price of $400 per share. Today it’s closer to $1,550. But this growth may not last. 2020 was undoubtedly an exceptional year. With brick & mortar stores reopening, the volume of ecommerce sales will likely suffer. And consequently, Shopify’s growth rates may begin to slow. Needless to say, that’s not a good sign for a growth stock. And so, the share price could take quite a tumble should sales begin to decline.

Zoom Video Communications (NASDAQ:ZM) became a household name last year when working from home became the new norm. The video conferencing specialist quickly adapted its technical capacity to support the sudden surge in demand for its technology. And it continues to improve features, performance and security today. 

The stock of the video conferencing company was around $68 per share at the start of 2020. Today, it has crossed the $360 mark. Moreover, the company’s earnings reported a three-fold increase in its last yearly report. That’s quite impressive in my eyes. But it’s far from risk-free. 

Online video conferencing is undoubtedly a growing market. But I believe the barriers to entry are relatively low, allowing many new businesses to enter the field. Microsoft’s Teams app has already proven to be a popular alternative, and it’s far from the only one. These alternative platforms could steal market share if they can provide a more reliable or enjoyable experience. And if that were to happen, I would not be surprised to see this growth stock take a considerable hit.

Time to buy?

Both of these growth stocks carry fairly substantial valuations thanks to the expectations from investors. However, I do believe that they might one day become leaders within their industries. Therefore, despite the risks, I would consider adding them to my portfolio.