0

I have heard this advice from many people: If you want gains, you need to invest in companies with room for growth, not in companies, who already have the maximum market share.

Let's take Google as an example. Let's assume they have 100% market share of online advertising. Let's also assume in 2018 the last person on earth goes online and there is no more growth for Google.

Why would the stock price stop growing, even if Google is in a great market position (monopoly) and very profitable and keeps increasing its pile of money? Shouldn't the fact, that it keeps its great position be enough for the stock price to keep rising?

  • "assume in 2018 the last person on earth goes online and there is no more growth" So except to (numerically) replace those who die, no more people are ever born, and the human population stagnates? – a CVn Jan 1 '18 at 16:18
  • Why are you equating "person is online" with "person uses Google" (or rather, "person uses every product Google provides")? – chepner Jan 1 '18 at 17:15
  • @MichaelKjörling Yes, something like that! Or perhaps a slow grow. – user1721135 Jan 1 '18 at 19:40
2

The market share doesn't matter. The revenue matters, and the profit matters more. 100% market share means the company can still grow if they manage to grow the market. The 100% market share can make it possible to increase revenue and profits even if the market doesn't grow (in some countries the company would have to be careful not to fall prey to laws about anti-competitve behaviour).

3

Why would the stock price stop growing... Shouldn't the fact, that it keeps its great position be enough for the stock price to keep rising?

First of all, 100% market share would not in and of itself cause a stock price to either stop growing or continue growing. There are many factors that contribute to a stock price.

Your question seems to indicate that you think that a monopoly would have a constantly increasing share price, which indicates that you equate share price with current profits. But remember that the value of a company is obtained by its future ability to generate cash. If a company has reached 100% market share, and the market knows that, then its ability to generate cash in the future should be certain, so its stock (all else being equal) should NOT grow any more.

However, as others have mentioned, a company that has cornered a market can grow in other ways. It can create new markets, continue to innovate to expand the current market, or acquire other companies to reduce its costs (vertical integration) and improve its margins.

  • Not sure I understand. "its future ability to generate cash" -> with a cornered market its clear that the cash will keep flowing. So why shouldn't the price rise? Or is price growth always linked to company growth? – user1721135 Jan 1 '18 at 19:43
  • but if the market is cornered, then future cash flows should be fairly well known as well. Stock price is less about what the company will do next year but more about what it will do over the next 10, 20 years. If that future is known then it will be reflected in the _ current_ stock price. In other words, no, price growth is not always linked to company growth. That's just one of many factors. – D Stanley Jan 2 '18 at 14:21
2

Not necessarily. The market may grow.

Imagine all sold phones are from Apple, thus they have reached 100% market share. But what if the next year twice as many people want a new phone. More phones get sold, Apple makes more money and their stock price rices.

  • In that case Apple would probably grow with the market and not be able to outperform it? – user1721135 Jan 1 '18 at 19:47
  • @user1721135 It wouldn't outperform the market, because the market grows as they grow. – Martin W Jan 2 '18 at 11:07
2

the ability to generate recurring revenue is more important than market share.

Assume all the people on earth use google. Google generates revenue not directly from the searchers. Instead the companies that advertise to searchers pay google. Companies compete among themselves and grow. New players join the race as well. The cost of advertising will naturally increase year after year. Hence google will grow as long as businesses exist. A simplistic view is as follows. Let us assume the share price of google truely reflects earnings. If companies that use google increase their pay the earnings will rise. And share price will follow.

1

Also, there’s no law restricting companies to one market. A company like Google with superb technical skills and a massive cash flow from dominance in one market is well placed to enter or create new markets in order to continue to grow.

  • Sure and that's what they are doing with all their moon shots, but they haven't been successful so far. It could also be that Google is a one trick pony. – user1721135 Jan 1 '18 at 19:46
0

Fluctuations in stock price are due to changing investor beliefs in the future profitability of the company. Sustained increases, however, are due to the time value of money and risk premium. Stocks with steady returns and low risk are known as "blue chip" stocks. These stocks have low risk premium, so their average increase is lower than riskier stocks, but they also have less variance. Their returns are mainly from the time value of money. That is, people prefer to have a dollar today then a dollar a year from now, so some premium must be paid to get investors to give up money now in exchange for money later. This premium can be either dividends or rising stock price. Blue chips tend to favor dividends, which means that their stock prices rise more slowly than if they were to keep that money as equity. In practice, because even blue chips still have room for growth, their stock prices do tend to still increase. Remember, the economy as whole is increasing, so even if a company has a constant share of the economy, their total size will still be increasing. If a company were completely steady state and paying out their income in dividend, then their stock price would stagnate (in inflation adjusted terms), but that doesn't mean that investors wouldn't be getting gains; the investors would still be getting the company's income as dividends.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.