How does the industry life cycle impact the stock price?
The industry life cycle refers to the stages of growth, consolidation, and eventual extinction of an industry. It typically consists of five stages: startup, growth, shakeout, maturity, and decline.
- Startup stage
Companies at the startup stage are likely to generate zero or low revenue and experience negative cash flows and profits, due to a large amount of capital initially invested in technology, equipment, and other fixed costs.
- Growth stage
At the growth stage, revenue continues to rise and companies start generating positive cash flows and profits as product revenue and costs surpass break-even. At this stage, investors tend to enter the market, and the stock price may fluctuate massively or go up.
- Shakeout stage
At the shakeout stage, some businesses are naturally eliminated because they are unable to grow along with the industry or are still generating negative cash flows. Some companies merge with competitors or are acquired by those who were able to obtain bigger market shares at the growth stage. At this stage, the growth rate of revenue, cash flows, and profit starts slowing down as the industry approaches maturity. At this stage, a shakeout is simply a period of market turmoil that causes investors to pull back, leading to a market correction.
- Maturity Stage
At the maturity stage, the focus shifted from growth to increasing the cash flow and revenue through the appropriate strategies. They don’t have to spend on R&D or marketing, but competition is intense at this phase. At this stage, the stock price may be more stable. However, some blue-chip companies are usually between shakeout stage and maturity stage, and they probably can provide a stream of income, which can be especially valuable during inflationary periods.
- Decline stage
At the decline stage, many companies in the industry face difficulty surviving or prolonging the successful period due to no growth and intense competition. Therefore, they have to find strategies apt for the phase to sustain. At this stage, investors tend to sell off stocks as the company is not attractive anymore.