Why Do Stock Prices Rise When a Company’s Revenue Grows?

Why Do Revenue and Stock Prices Move Together?

There’s a saying you hear often in the stock market: “When revenue grows, the stock goes up.” But far fewer investors understand why that’s the case—or why it sometimes isn’t. The essence comes down to two points. First, a stock price reflects the present value of the cash flows a company is expected to generate. Second, it depends on how much, how long, and how safely revenue growth can expand those cash flows. This piece explains, in plain terms, how revenue growth flows through value into price, and then covers exceptions and a practical checklist for real-world investing.

Stock Prices Reflect Expected Cash Flows

The difference between Value and Price

Value is the sum of a company’s future Free Cash Flows (FCF) discounted at an appropriate discount rate. The value of the entire business is typically referred to as Enterprise Value (EV), and can be understood simply as EV = Equity Value + Net Debt.
Price is the market-traded share price, where Market Cap = Share Price × Shares Outstanding. Even if EV rises, equity value may not increase as much if the company has substantial debt. Conversely, with share buybacks reducing the share count, the stock price can rise even if total value is unchanged.

The four pillars that move stock prices

Cash flow level: How efficiently revenue converts into profits and cash
Growth durability/pace: How fast and how long those cash flows can grow
Risk/value certainty: How low the volatility and uncertainty are → captured in the discount rate (WACC)
Share count dynamics: Issuance/stock-option dilution vs. buybacks/retirements

In short, revenue directly affects the first two pillars (cash flow level and growth). When value rises as a result, price tends to follow.

How Revenue Growth Translates Into “Value”

1) Revenue → Margin → Profit

If cost of goods sold and SG&A scale up with revenue, incremental profit may be limited. On the other hand, businesses with high fixed costs can benefit from operating leverage, where a small revenue increase leads to a large jump in operating income.

Example: With annual revenue of 100, a 40% gross margin, fixed costs of 30, and variable costs of 30, operating income is 10. If revenue rises 10% to 110, variable costs increase proportionally to 33 while fixed costs stay at 30, so operating income becomes 110×0.4 - 30 - 33 = 11 → profit growth often exceeds the 10% revenue growth.

2) Profit → Cash Flow (FCF)

Accounting profit doesn’t translate into cash one-for-one. Working capital and capital expenditures (Capex) are required. The higher the growth rate, the more inventories and receivables build, and the higher the reinvestment rate needed to sustain growth. For the same revenue increase:

Recurring software models, which require upfront investment but have low ongoing maintenance, tend to convert to FCF quickly.
Manufacturing and asset-heavy industries require larger Capex, making revenue growth slower to translate into FCF.

3) The quality of the growth path

What matters is whether growth is “good growth.”

Pricing power: If you can raise prices without discounting and with low churn, that’s high-quality growth.
LTV/CAC: An LTV/CAC ratio of 3 or higher is generally healthy.
Sales mix: A rising mix of high-margin products/regions creates more value for the same revenue.
One-off vs. recurring: Subscriptions and repeat-purchase businesses are typically more valuable than upfront fees or one-off projects.

4) Discount rate and duration

Even with the same revenue growth, a higher discount rate (WACC), driven for example by rising interest rates, lowers present value. Conversely, the longer growth can persist (e.g., due to network effects and high switching costs), the larger the impact on value—often exponentially so.

Why Revenue Can Rise Yet the Stock Doesn’t—or Even Falls

Expectations and consensus

Stocks react to results vs. expectations more than to absolute results. If the market already expected 20% growth but the company delivers 18%, the stock can drop even though revenue grew. A lowered guidance makes it worse.

Margin pressure and cost structure shifts

Increases in raw material costs, labor, or promotional spending can compress gross and operating margins, offsetting any increase in value.
If the cost of maintaining high growth surges (e.g., higher CAC, more rebates), growth becomes “expensive.”

Cash conversion headwinds: working capital and Capex

As revenue rises, inventories and receivables can swell, reducing FCF. If growth requires large Capex—new plants, distribution centers—near-term FCF can deteriorate despite higher sales.

Dilution and capital structure

To fund growth, frequent equity raises, convertibles, and stock option grants can increase the share count and dilute per-share value (EPS, FCF per share). Conversely, buybacks support the stock even if total value is unchanged.

Exogenous factors: rates, FX, regulation

Higher interest rates lift discount rates and compress multiples (multiple derating). FX swings change reported results via translation effects. Regulation or intensified competition questions the duration of growth. All of these can weaken the link between value and price.

A Bit of “Math” Linking Value and Price

P/E, growth, and discount rates—an intuition

Borrowing intuitively from the Gordon model:

P/E tends to be higher when growth (g) is higher and the required return (r) is lower.
If growth quality improves—via higher margins and better FCF conversion—multiples can expand. In other words, when revenue growth translates into earnings growth, margin improvement, and longer duration, both multiples and earnings rise, amplifying share price performance.

Interpreting EV/Sales for high-growth companies

When profits are minimal early on, investors look to EV/Sales. A rough way to think about fair EV/Sales is as a function of “target future operating margin × FCF conversion × growth durability ÷ (WACC - g)” (conceptual simplification). Even rapid revenue growth won’t support high multiples if the market lacks confidence in target margins or if WACC rises.

A small numerical example

Company A: Revenue 1,000, operating margin 10%, FCF conversion 70% → FCF 70. If growth is 10% and WACC is 10%, the growth premium is limited.
If revenue grows 15% and margins improve to 12%, FCF rises to 96 (about a 37% increase). With the same WACC, value can rise far more than revenue. If the market believes margin gains are durable, multiples can expand as well.

A Practical Investor’s Checklist: Will Revenue Growth Lift the Stock?

Quality of revenue: Recurring mix, retention/churn, pricing power
Margin trajectory: Trends in gross and operating margins, list price vs. discounting, SG&A leverage
Unit economics: LTV/CAC, cohort profitability, customer payback period
Cash conversion: Working capital needs, FCF margin, Capex/sales, ROIIC (return on incremental invested capital)
Managing expectations: Results/guidance vs. consensus, the quality of the beat (price vs. volume vs. one-offs)
Capital structure and per-share value: Debt maturity profile, interest expense sensitivity, dilution/buyback plans
External variables: Rate/FX scenarios, regulatory/competitive intensity, supply chain risk
Valuation framework: Reasonable multiple ranges (P/E, EV/EBIT, EV/Sales) under growth–margin–risk assumptions
Duration test: Moat, switching costs, network effects, product–market fit

Final Thought: Revenue Is the Starting Point, Value Is the Process, Price Is the Outcome

The reason stocks tend to rise when revenue grows is simple: it raises expectations for future cash flows. But for those expectations to become reality, revenue must convert efficiently into profits and cash, the growth must endure, and risks must be managed. The market prices its confidence in these three things. Better investors don’t stop at the headline “revenue growth” number—they also examine growth quality, cost structure, cash conversion, capital allocation, and the discount-rate backdrop. If you understand how value rises and how much of it accrues on a per-share basis, you’ll see far more clearly why some revenue growth propels stocks significantly while other growth does not.