What is a Pure Play?
Pure plays are considered risky—but some investors love them. Let's find out why.
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Quick math question: What’s 2 + 2?
We all know the answer: 4.
But, you can also get 4 from adding 3 and 1. You can also subtract 10 from 14. Or, multiply 20 by 2 and then subtract 36. (Stay with me here.)
You see, the same way you can use different methods to get the same result in math is how you can use different strategies to reach your investment goals. 🧿
Most people believe that the key to building a strong investment portfolio is diversifying. Large corporations and conglomerates like Google, Amazon, and Microsoft are favorites among investors. This is because they offer a diverse array of products in different markets. From the perspective of an investor, there’s an element of safety here: should one product fail, there are others these companies can depend on for revenue.
But, did you know that diversifying your portfolio could also mean investing in companies that only sell one product or service? At first glance, that might sound risky. One product? That feels like putting all eggs into a single basket – and we know how that’s “supposed” to go. 📉
When it comes to pure play investing, however, this idea isn’t as far-fetched.
Simply defined, pure plays are companies that focus on a single business, product, or industry. Investing in a pure play company is considered “simpler” because an investor only needs to study the industry in which this product is being sold.
High-performing pure plays such as Tesla are another reason why investors opt for this approach. With the right companies, investors can increase the likelihood of growing their returns and boosting their portfolios.
Yet the promise of simplicity and increased returns can’t be the only reasons one should invest in pure play stocks. There are a series of crucial risks to consider as well.
Let’s dive in to uncover everything you need to know about pure plays. 👇
- What is a Pure Play?
- Pure Play Stocks: Pros & Cons
- Reasons to Consider Investing in a Pure Play
- Examples of Pure Play Stocks
- How to Invest in Pure Play Stocks
- Risks of Long-Term Investments
- What to Look for in Pure Play Stocks
- Who Should Invest in Pure Play Stocks?
- Get Started with a Stock Broker
What is a Pure Play? 📚
A pure play is a publicly-traded company that focuses on selling one line of business, as opposed to diversifying and selling in multiple markets. Therefore, the performance of a pure play’s stock is reliant on the performance of that specific product or service.
An example of a pure play company is Netflix, whose sole line of business is offering a subscription-based streaming service to its customers. Netflix does not offer any other products outside of this, meaning their stock performance depends heavily on how well their streaming platform performs.
Because a pure play only has one line of business, this can make it easier for an investor to decide if the company is a good investment or not. But this doesn’t mean that it is risk-free to invest in a pure play (we’ll come back to this a little later).
Pure Plays vs. Diverse Companies ⚔
Diverse companies are considered the opposite of pure plays. A diverse company is usually a corporation, or a company with subsidiaries that can span dozens or even hundreds, which offer a wide variety of products in multiple markets.
An example of a diverse company, and a direct competitor to the pure play Netflix, is Disney. While Disney does have a streaming service that competes with Netflix, this isn’t their only line of business. The conglomerate is also involved in traditional media networks (ESPN and ABC), theme parks, experiences, and products, as well as studio film. Therefore, they are present in multiple markets and are clearly not considered a pure play.
Investing in a diverse company is different from investing in a pure play because the investor must look at the company’s performance in all the markets it is selling in, as opposed to focusing on just one. As one can imagine, it takes a significantly longer amount of time to research a diverse company’s stock when compared to a pure play – especially for novice investors who are still learning the ropes.
Advantages of Pure Play Stocks ⚖
It’s good to consider all aspects of a trading strategy before selecting one. So, let’s take a moment to weigh the major pros and cons of investing in a pure play company.
A Pure Play is Simpler to Analyze 📖
Because a pure play only has one product line, this means an investor only has to fundamentally analyze the market that the respective product offering belongs to. This makes the pre-investing research of a pure play much simpler than that of a diverse company.
Wells Fargo is an example of a pure play commercial bank that, despite its challenges, continues to perform well in the market. Though the company boasts over 7,000 branches in the United States, their only “product” is banking and financial services. So if an investor is interested in this company, they only need to study the banking industry to understand Wells Fargo’s performance.
An investor would have to take a different approach if they were to invest in a conglomerate like JPMorgan or Goldman Sachs, which have subsidiaries in multiple industries, including insurance and real estate. From this perspective, one can see why analyzing a pure play company would be simpler than studying a diversified company.
Easier to Align Investments with Values 📊
For traders who want to be intentional with the companies they invest in, the pure play approach could help make this possible. Studying pure plays allows socially responsible investors to identify problematic practices in a business quickly, in comparison to trying to follow the practices of a diverse company.
Pure plays offer a higher level of transparency as it’s easier to trace what a company does in order to conduct their line of business. So, if Alex is an investor who strongly believes in veganism, he might take interest in Beyond Meat – a pure play that offers alternative meat solutions. Since this is the company’s only line of business, Alex can easily access information on the company’s production processes, the contents of their products, and their overall business practices.
But, if he were to try to do the same for a company like Danone SA, that also offers alternative meat options, it might not be as easy to get this same information. With a diverse company that has multiple subsidiaries, it could be harder for an investor to identify which companies mirror their values.
High Return Potential 💰
Pure play companies that are industry leaders in their respective fields can provide investors with the potential to earn significant returns. If the market performs well, a pure play has the potential to earn higher revenue and, hopefully, profit. A portion of a company’s profit is passed on to investors in the form of dividends, so a high-earning pure play can lead to increased stock prices and dividends for investors.
Tesla investors could be in for a treat, after the tech giant announced its plans to split its stock for the second time in two years. The pure play EV manufacturer experienced significant growth at the beginning of the year, after securing government approval to start delivering cars from its new Berlin factory.
While stock splits do not necessarily change the value of a company, they do lower the price of a share, which in turn can increase demand and, therefore, the price. In 2020, when Tesla announced its first split, investors received 5 shares for every one they already owned.
$TSLA’s price experienced an immediate spike after the announcement, and despite the challenges the company has faced, the share price has risen steadily since then. Now, investors get the chance to reap the benefits of the high-performing pure play, and this could repeat itself once the split is finalized and shares are allocated accordingly.
Disadvantages of a Pure Play ⚠️
While there are certainly some benefits of pure plays, there are also some pitfalls. At a minimum, every investor should be aware of these, in order to conduct a proper risk assessment before diving into a pure play.
When a Competitor Takes the Lead 🏆
In today’s market, it is difficult to stay competitive, and it is even harder for a company to do so when they only have a single product to promote. At any time, another company could come along and steal the pure play’s thunder.
Remember Blackberry? At one point in time, Blackberry was a pure play. The company dominated the premium cell phone market in the early 2000s as people everywhere rushed to purchase one of their useful products. As a result, the stock soared.
But then Apple and Samsung released their own premium products, and suddenly, the hold Blackberry had on the market began to slip. Unfortunately, they were unable to ever recover even as the company tried to create new products and collaborate with other companies.
When the Product Loses Appeal 📉
Just as succeeding with one product can bring amazing returns, it’s important to consider the loss that could take place should that one product fail. Sometimes, a company chooses to diversify, in order to manage risk tolerance and protect their future.
Think about Blockbuster for a moment. Blockbuster was a pure play that had the market locked when it came to video rental services. Try as competitors might, they couldn’t hold a candle to Blockbuster, until the rise of the internet.
The video rental industry went under overnight as people switched to services like Netflix which were more convenient. Because Blockbuster only had that one product, they didn’t have anything to fall back on. As a result, the company folded and their stock lost value; resulting in losses for its investors.
When the Market Fails ⛓
When investing in a pure play company, an investor needs to understand the industry the product belongs to. This is because if the market goes away, or disappears entirely, so will the product.
During the COVID-19 pandemic, many people all over the world were stuck at home and unable to go to the gym. This led to the rise of the Peloton product, which allowed people to work out, with a social experience from the comfort of their own home.
As the pandemic restrictions began to ease, however, people went back to their old preference of working out in actual gym classes–where they could get the exercise and the real social experience. Overnight, this caused Peloton to run into problems as the at-home workout industry experienced a major shift as people returned back to the gym.
Reasons to Consider Investing in a Pure Play
The risks that come with investing in a pure play are valid, and are enough reason to intimidate investors, but sometimes the pros do outweigh the cons. One of the main reasons investors choose a pure play is because they are new to investing and they don’t have time, or the ability, to analyze diverse corporations just yet.
Pure plays give beginners a chance to get their feet wet with the analysis of a single company, with only one product, as they are just getting started. And overall, the analysis of these companies is just easier–it’s that simple.
Additionally, investing in a pure play company lends itself easily to many popular investment strategies. For example, a bottom-up investor might pick a pure play company because they like the product the company offers.
Examples of Pure Play Stocks 📝
Sometimes, it can help to understand what a pure play is by looking at some examples of pure play stocks. Here are some of the largest and most famous pure play stocks.
Starbucks is a pure play in the coffee industry because, unlike its major competitors, Starbucks only sells coffee and tea. They may sell it in both their storefronts and in stores, but this is still considered a pure play because all they sell is coffee and tea products.
A major competitor to Starbucks, McCafé, is not a pure play because McCafé is owned by McDonald’s. McDonald’s is a multinational fast food corporation that is involved in multiple markets. Therefore they aren’t only in the coffee market as Starbucks is.
While Starbucks does hold the highest share in the coffee market, the company always faces the risk of being outdone by another competitor that offers coffee at a lower price point and provides customers with a better dining experience.
Should that happen, the company would need to think of diversifying their revenue streams, or taking more costly measures to outdo their competition.
Tesla is another example of a pure play because they only offer one product, and that is a line of premium electric cars. Even though other car companies create electric cars, they almost always have other gas-powered cars available as well.
Tesla is also a great example of the fact that an investment in a pure play can be risky–because although the stock is up all time, Tesla experiences many ups and downs in their stock price because they are so dependent on the materials and plans for their single product. Just look at the current worries the company is having due to the fact that many of their parts come from China.
If the United States were to embargo China as they have embargoed Russia, this would make it difficult for Elon Musk to produce the cars he already has orders for. This could spell disaster for the company if they had to cancel all the orders they currently have for Tesla vehicles.
While Starbucks has the corner on the American coffee market, Coca-Cola has Americans purchasing its soft drink product in droves. Like the other pure play companies on this list, Coca-Cola only has one product, and that is sodas.
Although it sells different flavors of soda, Coca-Cola is still a pure play compared to other companies like Dr. Pepper which owns other drinking companies, like Keurig, which is a coffee company, not a soda company. This makes Dr. Pepper much more diverse than Coca-Cola.
Now it is unlikely that Americans, or the world for that matter, will lose their taste for soda overnight, but if it were to happen, this could spell disaster for a pure play like Coca-Cola.
Companies that are Not Pure Plays 🚧
You probably have a pretty good idea of what a pure play looks like by now. But just in case you don’t, below are a few companies that are not considered pure plays. Remember, a company isn’t a pure play because they are popular, rather they are a pure play because they only have one thing to sell.
This may come as a surprise, especially since Blackberry made the list of pure plays. Unlike Blackberry which only offers a phone, Google offers a wide range of diverse products in numerous markets.
Where to start? Google has its search engine which is used around the world. They also have a line of cell phones, as well as email and chat software. This means that even if a huge change happened in the phone world, Google would be fine. Therefore an investment in Google would be an investment to diversify your portfolio.
Another example of a company that is not a pure play is Amazon. The multi-technology corporation is involved in cloud-computing, digital streaming, e-commerce, artificial intelligence, and studio film. Amazon literally sells every product under the sun.
Not only that, but even if the internet ended tomorrow (unlikely) and everyone went back to brick and mortar shopping, Amazon still has a delivery infrastructure that includes vans and planes, as well as ownership of Whole Foods, a brick and mortar grocery store.
Amazon is so diverse, with its hands in almost every industry, it’s the exact opposite of a pure play. Those who enjoy the simplicity of researching a pure play would be shaking in their boots if they had to research all the income sources of Amazon.
How to Invest in Pure Play Stocks 👷♂️
Ready to take a dive into the pure play stock world? The good news for new investors is that it is pretty simple to get started. After you’ve done your numbers, set your budget, and selected a trading platform that meets your needs, then you can start looking at potential stocks to invest in.
An investor should start their pure play investing journey by looking into companies to see which ones have only one product to sell. This can usually be found by doing a simple Google search of the product then seeing what other products are offered under the same company name. Once an investor has a few companies they are interested in, the investment portion can begin.
Generally, professional investors recommended looking for undervalued pure play stocks to invest in. This can be done by examining the P/E ratio. Many investors also choose to look at the price to sales ratio and the price to cash flow ratio as well. Growth investors looking to earn dividends may additionally evaluate the PEG ratio of a company.
When an investor has found an undervalued pure play company, they will generally open a traditional position in that company. Unlike other forms of trading, like long-term investing, where an investor doesn’t have to check their investments regularly, remember that in pure play investing involves investing in a stock backed by a single product.
Therefore investors should keep an eye on their pure play investment and consider the position in the event they think the market is changing.
Peloton: Risks of Long-Term Investment ⚠
Looking for an explanation as to why pure play stocks can’t be left unattended? Peloton is an example of what can happen to a pure play investment when it is invested in for the long term and not reviewed with some frequency.
Peloton was lucky because when the company launched in October 2019, they had no idea that a pandemic was about to hit that would drive their sales through the roof. And that’s exactly what happened. Over the course of 2020, the brand new company experienced stock growth from $30 a share to over $151 by the end of the year as people rushed out to buy the stay-at-home exercise system.
Unfortunately, for investors who originally got lucky with the pure play buy, if they weren’t paying attention to the news, they later found this major win to be a major loss as people began to return to their preferred in-person gyms rather than working out at home. Because Peloton is a pure play, with no other products to offer, as the at-home fitness market settled down, so too did the profits of the company.
Unless another pandemic hits (hopefully not!) it is unlikely that the home fitness market will ever bounce back to where it was during covid. So those who lost money investing in Peloton will likely never earn it back–reminding investors everywhere of the risks of investing in a pure play stock for the long term.
What to Look for When Investing in Pure Play Stocks 🔍
So, the goal is to invest in pure plays that have promise of performing well in the long-term. Easier said than done. How does one know when a pure play stock is a good buy or a bad buy? Let’s find out.
A Successful Product on the Market 🎯
The same way one wouldn’t buy a bike that they weren’t sure was going to carry them to their destination, is how one should never purchase a company that sells a product they don’t think will sell. Especially when that product is their only one on the market.
Investors should take a deep dive into the product of the company they are interested in buying. Ask the question, “Would I buy this product?” If so, why? It’s also important to consider if other people will purchase it.
The more positive answers one has to the questions above, the more likely the product they are considering is a good investment. But remember, there are other customers to consider, too. It’s important for investors to take a look at the sales report of the product to ensure the market agrees with them, too.
Track Record of Growing Sales 📜
It’s not enough just to invest in a product that sells, investors should focus on investing in companies that are growing. This is where an investor should take into account the PEG ratio of a company when conducting stock analysis as this will let them know the potential of the company to grow.
A company that has no potential to grow is never a good investment as the stock price won’t increase, and if there are dividends offered, they will dry up over time. Remember, however, that the PEG is only a prediction of growth and even though a product may have grown in the past doesn’t mean it will grow in the future–you also need to think about the market as a whole and evaluate if there is room for the company to expand.
This is when you should ask questions like, is the market’s product saturated? Is the product reusable, therefore lowering the chances that a customer will repurchase the product? The answers to these questions bring you to the next section of analysis, which is, taking a look at the market potential of the product.
Market Potential 📈
When you look at the market potential of a product, this means that you look towards the future and see if there is potential for the product to continue on its growth trajectory. Some companies only sell one-time products, and in a pure play company, this can make it difficult for them to experience continued growth.
For example, an investment in the pure play Starbucks has continual room for growth as it is likely that people will continue to buy coffee, and since it is consumable, there is a chance they will buy more. This is in stark contrast to an investment in the pure play Peloton, which is a one-time purchase (although it does have a subscription service, that people add and cancel all the time).
And if you look at this example, it explains a lot about the importance of market potential. Which of the above companies is performing well? The one with more market potential.
Intellectual Property 🥇
Remember earlier when competition was mentioned? Competition is a huge problem with investing in a pure play because they only have one product, and it can be difficult to innovate the one product when a competitor pops up.
This is where it’s important to consider intellectual property. When a company has intellectual property, it means they have the knowledge, or a patent, that another company can’t have access to. Therefore it is difficult, if not impossible, for a competitor to rise up and steal their business.
This brings us back to Peloton, although it is a cool idea, there is no way to patent the idea of having a spin bike at home with a TV screen and wi-fi connection. Although Peloton can patent their exact design, there is no way to keep a competitor from doing the same thing, therefore making it not advisable to invest in Peloton due to a lack of intellectual property.
Who Should Invest in Pure Play Stocks? 🤔
Investing in pure play stocks isn’t for the faint of heart, as you need to keep in mind that it is very risky. Investing in a pure play stock is investing in a single product that could fail.
That being said, investing in a pure play stock is much easier than other active types of trading such as day trading or swing trading and may be advised for those new to the active trading market. Pure play investing may also be interesting to those who wish to trade actively, but don’t have the time to spend hours each day researching stocks.
Pure play investing won’t require the same amount as other longer-term strategies, but it’s important that you do your due diligence. Just remember that you must also be somewhat risk resistant, as there is no guarantee your pure play stock will be successful.
Final Word 🏁
Overall, if you are looking for a way to simplify your approach to investing, opening a position in a pure play may just be the answer you are looking for. Instead of researching several products a company offers on numerous different markets, you will focus on a single product and a single market.
While this approach is easier, it isn’t risk-free, and it is definitely not a good fit for everyone. But if you are looking to try something new, and don’t mind a little risk, investing in a pure play company may be something you want to look into.
Pure Plays in Detail: FAQs
What is a Pure Play Marketplace?
A pure play marketplace is a marketplace where companies who only sell things via their online storefront make sales. An example of a pure play marketplace is Etsy.
Is Google a Pure Play?
Google is not a pure play company because, in addition to its search engine, they also manufacture phones, apps, and a variety of other products and services.
How Do You Differentiate Brick and Click and Pure Play?
Brick and click is where a store, like Target, has both a physical storefront and an online store. An example of a pure play would be a company with only an online presence (and only sold one major product or service)—and no physical store you can visit.
What's the Opposite of Pure Play?
The opposite of a pure play is a diverse business that has products that are widely different and span multiple markets. Smuckers, which owns a line of jams in addition to coffee company Folgers, is a diverse company.
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