After six tight and tense rounds, Smith exploded into action in the seventh, rocking Groves through a flurry of punches that sent his opponent to the ground and saw him unable to make the count.
Liverpool fighter Smith remains undefeated in his career, while he also won the Muhammad Ali Trophy, the WBC diamond and Ring magazine belts, plus a seven-figure financial reward.
Smith and Groves met in the unlikely setting of Jeddah's King Abdullah Sports City Arena, with Groves returning to the ring after beating Super Series semi-final opponent Chris Eubank Jr seven months ago despite suffering a dislocated shoulder in the final round.
It proved to be a cautious opening round by both boxers as they looked to gain ascendancy through probing jabs, and although Smith finished the first three minutes marginally stronger, there was nothing to choose between them.
Round two followed a similar pattern, with Smith looking to land a hefty blow on more than one occasion, but Groves showed his ring-craft to remain out of trouble.
Smith continued with his tactic in round three, and he caught Groves with a menacing right hand, yet he recovered quickly and reverted to a jabbing style that helped keep Smith at a safe distance.
Smith's punching power held him in good stead, and he looked to have grown into the contest more quickly than his opponent.
And while the first four rounds were close affairs, Smith would have been ahead on most scorecards.
Groves' strong combination work surfaced in the fifth round, but he knew that Smith's heavy-duty punching had to be countered, and he looked to have won the round before another full-on three minutes followed that saw more strong punching by Smith as it continued to be a fight with hardly anything in it.
Round seven proved a completely different story, though, as Smith unleashed ferocious power on his opponent to give him a huge pay-day and elevate him to boxing's next level.
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