Disclaimer: Stock prices are updated as of 10/3/16. The opinions stated in this article do not reflect the opinions of the Pitt Business Review and should not be taken as investment advice by a registered professional.
When you wake up every morning and go out into the world, you often don’t think of the companies you encounter. Proctor & Gamble contributed to your hygiene, Kellogg’s gave you breakfast, and you probably use multiple devices made by Apple. My question to you is, do you notice when these brands change? For example, do you remember when flip phones became smartphones, and now there are sixty-four phones released every year without buttons? You don’t remember that, and neither do I. However, I do know a little about the business life cycle. I also understand that the business life cycle can help one decide which companies they should invest in and at what time. Now you could probably find an unlimited amount of material on this subject. However, we are going to keep it simple. The periods I want to focus on are: seed, growth, expansion, maturity, decline and exit. The best way to approach this is to use examples featuring those same brands that influence your daily activities. Please enjoy and reach out to me if you have any questions. (Actually, just kidding, I’m in college and shouldn’t be trusted with your portfolio)
To start things off, the quintessential seed company that comes to mind is UBER. This firm has revolutionized the transportation industry and looking to lead the future of driver-less technology. I really wanted to display a 1 yr return for UBER, but they actually aren’t even a public company yet. That’s right, UBER is valued at around 50 billion and they are not listed on a stock exchange. As an investor, it must be exciting to think that they haven’t tapped the equity markets yet. To understand how much they’ve grown, they were only valued at 60 million in 2011. Annually that’s a growth rate of 284%. Personally, I don’t know if I could fathom any amount of money doing that over a period of time. They can’t do that forever, especially when they finally become a publicly traded company. But that is why we are here in the first place. To explain what typically happens after this point.
The next period I want to address is the growth period. Amazon AMZN is one of the fastest growing companies in the world. Their stock isn’t doing so bad either:
This is phenomenal growth, but that is expected from a company that revolutionized how we purchase almost everything. Holding this in your portfolio right now isn’t a bad idea considering they just recently became profitable in the last couple of years. As their cost structure becomes more efficient, they should have no problem growing earnings. At this stage of the cycle, Amazon is looking to penetrate new markets and find new customers in every segment of society. This is why they have ventured into the online streaming market with Amazon Prime. A more long term experiment has been the idea of drones delivering packages. Not only would this allow them to cut costs, they would be direct competitors of mail carriers throughout the United States. This shows that they are not only developing their core service, but they are building around it to offer a more complete business model to prospective investors. This level of growth is impressive, however, shareholders will expect innovation from this company for the foreseeable future.
A company similar to Amazon in growth, but farther along the cycle is Google GOOG. They represent the expansionary period. Their return over the last year is similar to Amazon in growth, but they have tapered off a smidge. And I do mean a smidge:
While still posting an impressive 14% in return the growth of google is just slowing down and they focusing to becoming a household name in as many markets as they can. This involves everything from virtual reality, driver-less cars, and smart home thermostats in England. Add in, a couple venture capital firms, YouTube, social networks, and mobile smartphones; Google definitely knows it’s in the expansionary phase. They are still growing, however, and their valuation will hit a ceiling at some point.
Arguably, this next company is one of their arch-nemesis. The ever so popular Apple AAPL is maturing right before our very eyes as a cornerstone of the consumer electronic market. This isn’t bad news as investors still value their shares very highly:
Notice how the line looks very volatile, however, they moved on 3.23% in the past year. Apple still growing, and many believe that they will be the first company to reach 1 trillion dollars in market value. I can’t doubt this claim as products like the iPod and iPhone have revolutionized technology throughout my young adulthood. Since the passing of the iconic Steve Jobs, Apple has focused on positioning themselves to change into more of a mature firm. While the market continues to look to them for life-altering innovation, their offerings haven’t been that groundbreaking as of late. You sort of get the sense, that they understand their position as well. In the past couple of years they’ve acquired Beats by Dre and started Apple Music. Fast forward a year and a half and now they are a major player in the music streaming market. Combine that with the untimely demise of the Samsung’s flagship device (Galaxy Note 7), and Apple is looking to finish out the year strong.
We have now come to the latter end of business cycle. These are companies that were once staples in sectors such as technology, and consumer goods. However, they have not been able to conform to the taste of consumers or the offerings of their competitors. Blackberry Limited BBRY, formerly known as Research In Motion, is struggling to regain the market share they once claimed in mobile technology.
Their 18.76% return is a positive for the firm, however their shares have been reduced to under the single digits after being valued at nearly $15 in 2013. Google, Samsung, and Apple have all been relatively successful in this new age of the smartphone. The days of button-filled, pocket-friendly devices are long gone. These last five years in mobile technology has been defined by bigger phones with less buttons and more screen real estate. The most polarizing change, however, is the debate between Android and iOS. Google and Apple have started the first mobile operating system war. In all this debate, Blackberry is nowhere to be found. They have tried to make some noise with devices such as the Blackberry Priv. Consumers just don’t seem to care as much as they once did. The company still has a loyal presence among the corporate executive market. The security of their phones is still something that is hard to find elsewhere in other devices.
Finally, we have come to the exit stage. Sears has been rattled by the recent wave of e-commerce. Their stock has been through nothing short of a bloodbath in the past year, falling by over 50%.
Most retail investors should stay away from their securities. Amazon and E-Bay have made it almost second nature for shoppers to look on the internet for their consumer goods. A core demographic that Sears has lost is women that are 55 years or older. Women have dropped their preference for Sears over 53% in the past ten years. Recently Moody’s has downgraded the company’s liquidity rating from SGL-2 to SGL-3. Moody’s defines SGL-3 as the following:
“Issuers rated SGL-3 possess adequate liquidity. They are expected to rely on external sources of committed financing. Based on its evaluation of near-term covenant compliance, Moody’s believes there is only a modest cushion, and the issuer may require covenant relief in order to maintain orderly access to funding lines”.
The rating agency justified the downgrade with the following statement:
“The SGL-3 rating reflects our view that Sears will continue to rely on external financing and the monetization of its alternative assets to fund its operating losses” stated Moody’s Vice President, Christina Boni. “We recognize the risks associated with relying on these sources and continued shareholder support to finance its negative operating cash flow which is estimated by Moody’s to be approximately $1.5 billion this year.”
Overall, this is usually what happens to firms as they progress through the markets. Some firms do stand the test of time and stay relevant forever. Other firms slowly fall as they fail to adapt to the changing business environment. This isn’t meant to say that all firms will experience an exit, however, they are all capable of dying out at some point. This should always be in the back of the minds of the average investor. The companies you want to own should be providing value to their shareholders for the long-run. In addition, growth can be a false metric used to disguise an underlying lack of long-term business strategy. Firms like Apple have been around for decades but have only seen real growth in the past 6 – 7 years. Companies such as Google, however, have been on a tear in the markets ever since their IPO. Moreover, it is up to the managers of each of these firms to find that value and use it to their advantage for as long as possible. In closing I would like to leave you with a quote from the great value investor Benjamin Graham, “Invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price.”