Definition: A pure play company is defined as a company that focuses on a single product or industry. In other words, a company does not diversify its product offerings or operating industries, but rather focuses on a single product or industry that it can become a leader in.
What Does Pure Play Mean?
Investors usually see a pureplay as a company with easy-to-follow cash flows and revenues, since the firm’s revenues are based on an individual commodity, product, sector, or industry, without the complications that product diversification or conglomerates create for valuation. Many investors tend to like these types of companies because their industries are narrow making their business models more slightly more predictable. For example, McDonald’s sells hamburger.
That’s it. If you invest in McDonald’s, you don’t have to worry too much about other markets or commodities because McDonald’s doesn’t sell anything else. Compare that with a company like GE that sells thousands of products across all types of markets.
Let’s look at an example.
Let us consider a pureplay company that focuses on a single, well-known commodity, such as gold. If you were to consider investing in a gold-mining company, what factors would you need to consider?
With such a singular operating structure, the questions that an investor asks are fairly simple: How much gold does the company have access to? How much gold can the company extract? How much is gold worth on the market? How and where is the company searching for new gold reserves?
Since the company only focuses on one commodity, the questions that you would ask to get a clear picture are much simpler than if you were assessing one company that operates in several industries. In addition, investors don’t have to think about the cash flows of various business models. The mining company gets cash one way—from selling the gold it mines. Companies like IBM sell products, builds databases and software, and services clients IT needs.
These three completely different revenues streams aren’t related and are affected differently by up and down turns in the economy. Thus, it’s more complicated for an investor to analyze than one that can be analyzed using the pure play method.