ResearchThe other side of concentration

The other side of concentration

Oct 16, 2020

In investing, "customer concentration" refers to when a company derives a meaningful portion of its revenue from one or a small handful of large customers. Often viewed as a risk and source of volatility, it means one-off changes to a few customers can have an outsized impact on the company.

However, we think customer concentration can ironically be a revealing indicator of a business that's poised to grow exponentially.

Take Fastly and Twilio for example, which we discussed yesterday. (We own these stocks for our clients in Opportunities and Flagship, respectively).

Both companies at some point had individual customers that represented over 12% of total revenues - TikTok in the case of Fastly, and Uber in the case of Twilio (back in 2017). Both companies also saw dramatic fluctuations in their stock prices due to this customer concentration. Fastly just experienced this yesterday, but Twilio went through a near-identical experience back in 2017. 

Early that year, Twilio plunged 26% in one day after reduced spending from Uber drove a cut in topline forecasts. But in the three years that followed, Twilio went on to 10x its stock price while increasing its annual revenue base by more than 100x the value of that original shortfall.

Did Uber dramatically ramp its spending back up? No. Twilio's Uber exposure actually kept declining as the strength of Twilio's offering attracted new customers ranging from startups to titans of industry at similar scale as Uber. That's the other side of customer concentration that often goes unappreciated. 

While customer concentration can happen for many reasons, it can be an indication of a very high quality product intersecting with a company still early on its growth curve - an attractive dynamic for long-term investors.

It's not easy for a young company to build a product that's so good it passes the smell test of even the largest customers (like Uber). When that happens, often the result is customer concentration. But it's just one of the many signposts of a small company able to hook a fish that typically swims in a much larger pond. 

As Twilio has shown, in a big enough pond, you don't need to catch every fish to bring in a large haul. We think Fastly will follow a similar journey.

Cash Management

Smart Cash

Smart Cash FAQs

Cash Options

Get Smart Cash

InstagramTwitterYoutubeLinkedIn

© Copyright 2024 Titan Global Capital Management USA LLC. All Rights Reserved.

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.

Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.

The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.

Cryptocurrency advisory services are provided by Titan.

Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.

Contact Titan at support@titan.com. 508 LaGuardia Place NY, NY 10012.