Investors have been momentarily distracted from looking at moats to finding disruptors. Be careful what you seek, true disruptors don’t sit comfortably in the world of capital markets.
The Gutenberg printing press was disruptive. Imagine Johannes Gutenberg conducting a series A VC funding round in the 1440’s?
We have been fortunate enough to witness the success of a true disruptor, the iPod/iTunes ecosystem. However, in 2002, I could not make an investment case for $AAPL based purely on the introduction of the iPod/iTunes ecosystem. I struggled with quantifying the addressable market for iPod/iTunes. I could see the havoc it would unleash on the music recording industry (the process is still being played out with streaming services).
- The iPod was released in October 2001.
- $AAPL’s share price in January 2002 was US$23.30, the share price bottomed in April 2003 at US$6.56.
Clearly everyone else was having a similar problem.
Is this Uber’s problem? What is the addressable market for its ride sharing service?
According to Uber, the San Francisco taxi market in 2014 was US$140 million per year. Uber’s San Francisco bookings revenue was US$500 million per year.
So what is Uber’s addressable San Francisco market?
Even if we get that right we should not extrapolate to other jurisdictions.
I love field of dreams scenarios but they don’t fit into my investment process.
Give me a company that steals market cap. I don’t know what to do with a company that creates market cap.
$AMZN isn’t inventing new markets, it is inventing new ways to do things better in existing markets. It is stealing market cap.
$FB may have developed a new medium but its revenue comes from the same advertising/marketing pool as all of its media competitors. It is stealing market cap.
If identifying a company’s sustainable free cash flow is the grail of value investing, then shouldn’t quantifying a company’s addressable market be step one in the investment process?
As investment analysts we have multiples and correlations on the tip of our tongues. Yet we scramble to our computers to retrieve demographic data. Having scrambled, do we then turn that data into information?
Addressable Market Definition
Addressable market is the size of the market that provides value to the owners of the business.
Uber’s pricing provides value to the consumer/user at the expense of Uber’s owners. So its addressable market is not the potential size of the ride sharing market. Cheap pricing is currently inflating the size of the ride sharing market.
Addressable market is also different for the proponents in the sector. The addressable market for Google and Facebook is the entire digital advertising/marketing spend. For the remaining competitors their addressable market is what is left over. Google and Facebook are now growing at a rate faster than the sector so it is a shrinking pie.
If the addressable market for a company is the entire market then that company has a competitive edge.
The previous notes on $NLFX Netflix the sequel? and $FB Pick The Mature Business – Facebook? both identified their respective addressable markets. In both cases current market valuations are implying that their addressable markets are larger than my analysis.
When we become owners of a business we inherit the industry sector dynamics and management. As owners we can only change management (although even that’s almost impossible to do in the case of $FB and $GOOGL). Occasionally we witness what Aswath Damodaran terms regulatory arbitrages, e.g. AirBnB and Uber. However governments never leave regulatory loopholes open forever.
So Uber has interest to me as a spectator but not an investor. The company has developed new services and acquired the very interesting Otto (self-driving trucks).
The competitive response to Uber is fascinating. Cadillac’s vehicle subscription service is very innovative for a company founded in 1902.
I want to watch Uber the movie not own it in my portfolio.
Sometimes you have to travel far to witness a market cap steal. In Australia, the dominant telco, Telstra, is capitalised at A$47 billion and TPG Group, a smaller competitor is capitalised at A$5 billion. TPG Group is the lowest cost producer in the Australian telco sector. This is not equilibrium.