When assessing whether a stock might be a good investment, Tinker often refers to CAP, SAM, and TAM. He places a lot of weight on these.
Yet, there may be people on this board, especially some who are know, who don’t know these acronyms and why they are relevant to assessing a stock.
If this post gets zero recommendations then everyone must know all about CAP, SAM, and TAM and their importance.
Chris
Well, I posted this about 2.5 hours ago and already 28 recommendations. I think that means there are a lot of people who don’t know these acronyms. It gives people an anonymous
way to indicate that they don’t know something (maybe they didn’t want to admit that they didn’t know so they didn’t ask the question).
I know that TAM is total addressable or available market.
I might know CAP is in concept but I don’t know this acronym. So I when I read Tinker’s posts that contain the term “CAP”, I don’t really know what he means. After Googling it, it didn’t return anything useful. Hopefully, Tinker will read this and explain…
Chris
CAP = Competitive Advantage Period (Tinkers term I believe)
I believe CAP means “competitive advantage period” but I could be wrong.
Rob
“competitive advantage period”
Is this a duration? How long into the future a company will maintain its competitive advantage?
Chris
Is this a duration? How long into the future a company will maintain its competitive advantage?
Chris
That’s my understanding. Basically CAP covers two things: one is competitive advantage, two is how long it will last.
Es CAP means how long the competitive advantage will hold, and how large of a competitive advantage it is.
I have found that if there is a large CAP, and the company is growing, you hold onto that company.
ISRG has one of the largest CAPs in the entire market at present, and has had it since 2005 or so, and still has it. The only competition it has is alternative manual methods w nothing successful in sight (its sole competitor, recently approved, is not doing good business at all).
But for later, lots to do today.
Tinker
…and SAM is Serviceable Adressable Market
Yes, that is what SAM is. TAM is total addressable market.
I only know one company that uses SAM, and that is Arista. Total addressable market can be utterly misleading. What Arista does is simply figure out what market they can currently address from a practical perspective, and over the years this grows.
You should listen to an Arista investor presentation, it is like talking to your handy man father in the garage in regard to matter of fact talk (as much as there is of it). I remember one where the question was addressed by one of Arista’s execs. And then he asked on multiple occasions, “do you have anything to add,” to his partner. The answer was, “no.” And then crickets for a few seconds and moving on.
When I find is a good time to sell even a stock with an enormous CAP (like QCOM had and still has in 3G) is when the SAM is vastly consumed and growth slows, unless the SAM can be materially increased with new product that the company will maintain a great CAP in.
I mean, look at Twilio, their total addressable market is all of telecom! But what they are doing is a heck of a lot more pedestrian. Thus totally misleading.
Btw/ one other way to look at CAP, is that in a competitive market all profits tend to zero. What that means is that companies will return to the mean in regard to return on capital, and thus if a business is sufficiently risky to require at least an 8% return on capital, as competitors enter the market the return on capital will fall to 8% (zero profit above the rate of return for the industry).
A strong CAP is the ability to prevent the company from returning to the mean of all other companies, and maintain vastly superior returns on capital above what a normal competitive market would be.
Tinker
ok I don’t know what it means…