The most important thing in investing - Total addressable market

I once had a conversation with a talented individual from the Value Invest Asia Premium Club on the topic of Total Addressable Market or TAM. 

This topic would be broken down into 3 parts: Sizing the TAM, what Phillip Fisher said and what it means for you.

Part 1:

1. TAM is the market size of sales of which the company is serving. A Wikipedia entry goes like this

“ Total addressable market (TAM) represents the entire revenue opportunity that exists within a market for a product or service.”

This is the annual revenue of a customer per year. Being addressable, it is really about the audience or customer.

As a member of the Toastmasters club, often we frame a topic as “what is in it for me?” - looking at things through the audience eyes. Effectively, each company should look at things through their customer lens, what is the customer journey?

Howard Schultz (CEO of Starbucks) says this best when he said in a boardroom meeting, they leave one chair empty to symbolise the customer. Now whatever decision they make, imagine the customer was in the room, what would they say? How would they feel?

Example of usage:

1. Here is a sample of an analyst report taking from Barron on Enterprise AI company C3. “With a TAM [total addressable market] of $270 billion and a product portfolio that is unmatched in the enterprise landscape, we believe C3 has the ability to further penetrate enterprises and governments across the board over the coming years.” 

2. Compare this against the customer existing revenue of US$200m in FY20 and you see tremendous potential of upside....even 1% of the TAM would mean a 14x growth in sales.

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Part 2: 

What legends say: Phillip Fisher 

https://news.morningstar.com/classroom2/course.asp?docId=145662&page=3&CN=sample

Phillip Fisher has a checklist of 15 things to look out for during investing. The first and foremost is this

“Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years? A company seeking a sustained period of spectacular growth must have products that address large and expanding markets.”

There are many parts to this but the key words is “sufficient market potential” and this of course means TAM. 

Fisher goes on further to say two scenarios - there are companies who are “able because they are lucky” and “lucky because they are able”.

Previously working at DuPont, Fisher could see that the chemical industry (lucky because they are able) had immense potential for multiple applications and products and this of course gives the drivers and possibilities for growth. Contrast this with the former - steel industry (commodity product) that grew as a result of urbanisation.

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Part 3:

When you invest. Consider the industry dynamics. Whether you are a Growth or value investor, it doesn’t hurt to have a tailwind of growth in your industry rising from the ever burgeoning TAM. If anything, we should seek for companies that are growing faster than their peers in a growing TAM market. 

That’s a multibagger in the making. And knowing this will definitely increase your batting average.

Invest well.