REVENUE, TAM, SAM & SOM

These numbers matter more than you imagine. What they mean & where to find them.

When I start researching the numbers of a company, the first two numbers I focus on are Revenue and TAM. The two go hand-in-hand. It will assist you in understanding the current growth and growth potential of a business.

WHAT IS TAM?

TAM is the overall revenue opportunity that is available to a product or service if 100% market share was achieved.

The TAM is important for businesses because it assists in estimating the amount of effort and funding required. They can then prioritize specific products, customer segments, and business opportunities. So, the TAM for mobile devices in SA is every user who owns/wants a phone.

WHAT IS SAM?

Serviceable Addressable Market is the segment of the TAM targeted by your products and services which is within your geographical reach. These are the people the business can reach with the right marketing strategy in terms of quality, price, functionality etc.

WHAT IS SOM?

The Serviceable Obtainable Market, which is the percentage of SAM that can be realistically achieved. Serviceable obtainable market shows how much of the SAM can be realistically captured by a business in the short/medium term. A combination of the competitive forces of the market and the company's own resources (financial and human), determine how much market share can be reached

WHAT IS REVENUE?

Revenue is critical when you look at any stock. I believe it is the heart and soul of any company. This is the income received by a company from its sales of goods or the provision of services.  In accounting, the terms sales and revenue can be, and often are, used interchangeably.

TAM leads to Revenue. It is that simple. Therefore the 2 are married in-community of property.

Revenue growth is essentially what distinguishes GROWTH stocks from VALUE stocks.

Growth stocks are companies that increase their revenue at a faster rate than the average business in their industry or the market as a whole.

EXAMPLE 1

You start a clothing brand. Your TAM would be every person on earth who wears clothing if you were present in every city on earth. Sorry but that's not going to happen!

Let's be more realistic. You open 2 stores in 2 cities and you focus on ladies and kids wear based on: the population, their style, and the revenues generated by other clothing companies in cities having similar demographics. That is your SAM: the demand for you type of products within your reach.  Now you are probably not the only clothing store in the city? So realistically you can hope to capture only a fraction of your SAM.

Now depending on your marketing strategy, style, quality, services offered like free alterations or delivery, you will attract a certain demographic to your store. The location of your store matters too. That is your SOM.

EXAMPLE 2

NIO is an EV company from China. When I look at the attached visual of who is currently the largest players in Mainland China, NIO doesnt feature at all and will they ever? NIO is expected to scale up and turn profitable within the next five years, but this is dependent on the company growing sales by successfully penetrating the mass market.

You need to look at the TAM, SAM and SOM and apply it to NIO or any other stock you are interested in. There are many websites that have TAM Calculators like Clearbit and Cognism.

***Not financial advice. For educational purposes only.