Industry Life Cycle Analysis

What Is Industry Life Cycle Analysis?

Industry life cycle analysis is part of the fundamental analysis of a company including the examination of the stage an industry is in at a given point in time. There are four stages in an industry life cycle: expansion, top, contraction, trough. An analyst will determine where a company sits in the cycle and utilize this data to project future financial performance and estimate forward valuations (e.g., forward price-earnings ratios).

Understanding Industry Life Cycle Analysis

However not really the situation, the life cycle of a particular industry will follow the general economic cycle. In addition, an industry life cycle might lead or lag an economic cycle, and can change from an economic cycle's phases in terms of expansion or contraction rates or duration of pinnacle and trough stages. During a expansion phase in open and competitive markets, an industry will experience revenue and profit growth, drawing in additional contenders to fulfill the developing need for that industry's goods or services. The pinnacle happens when growth drops to nothing; demand in the cycle has been met and winning economic conditions don't energize extra purchases. Industry profits smooth out.

The contraction phase of the life cycle starts sooner or later after the pinnacle shows up, portrayed by falling profits as current period sales are lower relative to prior period sales (when demand was on the rise). The contraction phase could be corresponding with a recession in the economy or only a reflection that short-term demand in the industry has been exhausted. During the contraction phase, the industry goes through production capacity adjustments, by which marginal players get shaken out and more grounded companies lower their production volumes. Industry profits decline.

This adjustment cycle, combined with a firming of the economy saw in employment and personal income numbers and the consumer confidence index, lead to the trough phase of the industry life cycle. At this stage, lower levels of industry demand are matched by the output capacity. As the economy accumulates strength, the industry life cycle starts again with the expansion phase. As referenced at the start, an industry life cycle is regularly tied to the economic cycle. The amusement and recreation industry is an illustration of such an industry. The technology industry, then again, has displayed life cycle developments at variance with the economic cycle. For example, industry profits have boomed even in times of no economic growth.

Utilizing Industry Life Cycle in Analysis

Analysts and traders frequently use industry life cycle analysis to measure the relative strength and weakness of a particular company's stock. A company's future growth possibilities might be brilliant (or dim) contingent upon the stage that it is in during an industry life cycle. Watchman's five economic powers change as an industry matures. For instance, contention is generally serious between companies in a sector during the growth stage. Startups cut prices and ship products as fast as conceivable in a bid to collect whatever number customers as could reasonably be expected. During this time, the threat of new participants eating into an existing company's market share is high. The scenario changes in the maturity stage. Less competitive startups and inferior products are gotten rid of or acquired. The risk of new contestants is low and the industry's product is adequately mature to be accepted in mainstream society. Startups become laid out firms during this stage however their future growth possibilities are limited in existing markets. They must scan out new roads and markets for profits or risk eradication.

Illustration of Industry Life Cycle Analysis

There was a boom in social media during the mid 2000s due to the outcome of Myspace, a social networking site that outperformed Google as the most visited place on the internet in 2006. Sites like Orkut (a Google venture) and Bebo contended to gain users in a crowded scene. Facebook (presently Meta), which had begun in 2004, was likewise gaining foothold among universities and was viewed as the second most well known social media site. There were indications of consolidation when Myspace was acquired by Rupert Murdoch's Newscorp. Ltd for $580 million out of 2005.

In any case, that valuation ended up being expanded after Facebook surpassed MySpace in rankings. MySpace eventually subsided into irrelevance after Facebook turned into a social media behemoth. With the exception of a couple, similar to Twitter, other social media sites likewise dropped off the radar. The social media sites that endure made a pounding debut on the stock market. Their valuations were viewed as high in comparison to their revenues, primarily on the grounds that investors expected critical growth in the future as social media became famous all through the world.

By May 2019, in any case, Facebook's valuation had declined and the company cautioned of leveling growth figures from now on. Snap Inc., one more social media company, was experiencing the same thing. The two companies answered by extending the scope of their operations to incorporate different products, like cameras and robots, in their portfolio.

As of December 2021, Facebook has just changed its corporate parent name to Meta Platforms. The company has rebranded and is growing new products and technology. These improvements have analysts and the company itself seeing Meta's valuation expanding over the long haul.

Highlights

• It is utilized to dissect a company's stock, contingent upon the stage that it is in during a life cycle.
• Industry life cycle alludes to the stages of growth, consolidation, and eventual termination of an industry.
• It reflects an economic cycle and comprises of four primary stages: expansion, pinnacle, contraction, and trough.