What Is a PurePlay?
A pureplay is a company or business model that focuses all of its efforts on a single business, product, or industry. For example, a company that specializes in manufacturing electric cars and doesn’t make another type of product could be considered a pure play.
A pure play is a company that focuses on a single type of product or service. The opposite of a pureplay is a diversified company or conglomerate. Conglomerates offer many products and services across various industries. Some investors prefer investing in pure plays because they are easier to analyze and give maximum exposure to a focused market segment. For instance, an investor who wants exposure to electric cars might prefer buying Tesla stock as compared to General Motors. This is because GM is involved not only in hybrid and electric cars but also in diesel and conventional automobiles as well.
When you’re investing your money in stocks of different companies, perhaps you’re looking for businesses that provide you with a steady stream of income from dividends. Maybe, you want to put your money into companies that can weather economic turbulence. Along with these considerations, you may want to look at other types of companies. Conglomerates have diversified businesses vs those that produce a single product line or business. The companies with a single product or business are called pure plays.
Key Points
- A pureplay is a company that focuses on only one line of business.
- Conglomerates and diversified companies are different because they have diverse product lines.
- Simpler to analyze – Pure plays have easy-to-understand cash flows and revenues and tend to cater to a niche market.
- Higher risk – Pure plays tend to do poorly in bear markets and come with a higher degree of risk.
What Is a PurePlay Company?
A pure play company is a term for a publicly-traded company that focuses its efforts and resources on only one line of business. As a result, the performance of its stock correlates highly to the performance of its particular industry or sector. Many electronic retailers, e-commerce companies, or e-tailers are pure plays. They focus on one particular type of product and sell it over the internet. However, if interest in their product declines even slightly, these companies are affected negatively. Pure plays can be e-commerce companies, but they can also be large corporations like Tesla or Starbucks.
Pure plays can be large corporations, too. For example, Dunkin’ Brands Group (DNKN), which owns the Dunkin’ Donuts coffee shops, and Starbucks (SBUX) represent pretty pure plays in coffee. An investor or trader who wants to get in on rising prices of this caffeinated commodity would likely target them. In contrast, The J.M. Smucker Company (SJM) would not be a pure play, because—even though it owns major java brands like Folger’s—it also owns, and perhaps is primarily associated with, jellies, jams, and other foodstuffs. It’s more of a food play than a coffee play. (Source: investopedia.com)
Pure Play Function
Positioning a company as a pure play allows owners and managers to focus on just a few core competencies. Narrowing a company’s focus allows leaders to eliminate distractions and to hone the firm’s unique sales proposition. For example, a company that sells nothing but washing machines can use the pure play business model to differentiate itself from competitors with broader offerings. Establishing expert status in a single area can help new companies attract attention from customers and investors.
Pure Play Features
The global business trends to emphasize outsourcing. But, most pure play companies prefer to handle as many of their critical business functions in-house as possible. For example, Amazon owns and operates its own fulfillment centers instead of relying on third-party warehousing and shipping companies. Smaller companies have since followed Amazon’s example, despite the challenges in building out sophisticated supply chain services.
Pure Play Retailers (e-tailers)
Pure play is also used to describe e-commerce businesses. Typically, those that only sell through the internet, and not through other channels. In its early days, Amazon had no physical stores and was the poster child of a pure play internet retailer. The term pureplay is now often used to describe companies that only operate over the internet. By this definition, some say Facebook uses a pure play business model.
PurePlay Company vs. Conglomerate
A pure play company is much different than a diversified company or conglomerate. Pure plays are generally simpler to analyze than diversified businesses. The revenue and growth of pure play businesses are easier to interpret than those of businesses whose revenue comes from several different sources. If a business’ income comes from a variety of products, then it may be subject to different profit margins and industry growth benchmarks. This can make it difficult to evaluate the health of the company as a whole. Secondly, pure plays offer the potential for high rewards if things are going well.
A conglomerate is one very large corporation or company, composed of several combined companies. It is formed by either takeovers or mergers. In most cases, a conglomerate supplies a variety of goods and services that are not necessarily related to one another. A newly-formed conglomerate becomes known as the parent company, while the smaller firms that compose it are known as subsidiaries. Each subsidiary acts independently of one another but reports back to the management of the parent company.
Conglomerates have diverse product lines and diverse sources of revenue. They may also operate in multiple industries. They tend to offer a wider range of products and services. Therefore, they tend to cross over two or more industries. Also, companies that fit this profile tend to serve a wider, more diverse consumer base. This may help bring in more revenue, boosting their bottom lines. 3M Company is a large conglomerate involved in a variety of industries, from home security to plastics and adhesives. Because of this diversity within its product line, 3M’s stock performance is not affected by one or two concentrated factors, but by many different variables.
Example of a Conglomerate
Berkshire Hathaway Inc. is a good example. It is one of the largest conglomerates in the world. It has been formed through years of acquisitions and mergers. Berkshire Hathaway is responsible for the ownership of companies that provide utilities, retail goods, transportation, and other services. This is in addition to the insurance and other financial services for which it is most well known.
Investing in PurePlay Companies
Financial experts say you shouldn’t put all your eggs in one basket by investing in a single company or industry. So why would anyone put their money into the stock of a company that only has one line of business? Well, there are actually a few reasons why investing in pure plays makes perfect sense.
- Easy to Analyze – Pure play companies are not that complicated. As a result, they are much easier to analyze. Because they are only involved in one type of business or product line, their revenues and cash flows are much easier to track and understand.
- Predictable – Simplicity makes the business model very predictable. It’s a big contrast to diversified companies that have money coming in from different sources, a wider range of customers, and cater to different industries.
- Dominate smaller markets – Pureplay companies serve niche markets. When they do well and they become popular their revenues increase. This plays out in the financial rewards for investors—their stock prices, or an increase in dividends if they pay them.
The pure play business model allows companies to experiment and grow without substantial investments in retail locations or branch offices. Traditional retailers are evolving to operate their in-house web services as versions of pure play companies. This enables them to compete more aggressively with web-only businesses. For example, Barnes & Noble is adapting by adding in-store pickup services and electronic delivery options to its existing store network. Future pure play businesses must consider the impact of an established brick-and-mortar competitor moving into their niche.
Amazon moves away from the pureplay business model
Investors’ (showed) initial dismay at Amazon’s self-distribution proposal. Only a few analysts understood the long-term impact of the bookseller’s pure play strategy. Instead of following competitors’ attempts to build e-commerce success on the back of existing brick-and-mortar locations, Amazon chose to retreat entirely to the web. As a result of the company’s investment, it expanded into direct sales for a variety of products beyond books. By some economists’ definitions, Amazon ceased being a pure play business when it started offering its own distribution and technology platform services to other companies. Its core operation, direct sales to consumers, remained a pure play despite product line diversification. Many company leaders like the singular focus of a pure play business when pitching for venture capital, but must capitulate to investor demand to diversify over time. (Source: smallbusiness.chron.com)
Pros and cons of Pureplay Business Model
There are pros and cons associated with being a pure play company. The pure play business model allows company leaders to focus on a narrow set of competencies. Their single product or service lets them restrict their attention to a core set of needs. This laser focus can lead to a competitive advantage and make the business a recognized expert or leader in that space. However, a pure play company is more sensitive to the economic and market forces that impact that space versus a diversified company. The company may benefit when those forces favor growth, but that same company can suffer more significantly when facing negative market conditions.
Along with conditions affecting business, the performance of a pure play may also be highly affected by the type of investing style that targets it. For example, if a pure play’s line of business is favored by growth investors, the company will do well during a bull market, when growth stocks tend to outperform the market. Conversely, during bear markets, when a value investing strategy is historically more profitable, a pure play associated with growth investing will do poorly. Due to their dependence on one sector of the economy, one product, or one investing strategy, pure plays are often accompanied by higher risk. They represent the opposite of diversified. On the other hand, this higher risk brings the potential for higher rewards because, when conditions are in their favor, pure play stocks can flourish—their performance undiluted by any other business activities. (Source: investopedia.com)
Frequently Asked about Pure Play Businesses
