What it means
A pure play company puts nearly all of its revenue and effort into one line of business. A miner that only digs for copper is a pure play on copper, whereas a conglomerate that owns a copper mine, a shipping line and a hotel chain is not.
The idea is that the share price will move closely with the fortunes of that single activity. Investors like pure plays because they offer clean exposure.
If you believe electric vehicle demand will grow, a company that only makes electric vehicle batteries lets you back that view without also buying a bundle of unrelated businesses. The reverse is also true, and a pure play can fall sharply when its single market turns against it.
Analysts also use pure plays as comparison points. When valuing a division of a larger group, they look for stand-alone pure-play companies in the same field and use their valuation multiples as a guide.
This is helpful because the market price of a pure play reflects one business, not a mixture. The trade-off is concentration risk.
A pure play has no other business to cushion it if its product goes out of fashion, a key customer leaves, or regulation changes. Diversified companies can balance a weak division with a strong one, while pure plays carry the full impact.
Pure plays are not always small. Some are global businesses that happen to do one thing very well, such as a large payments processor or an airline.
The label describes focus, not size, and it is usually judged by how much of the revenue comes from the core activity. A nuance is that the boundary is blurry.
A company with 90% of revenue from one activity is often called a pure play, but one with 60% may not be. Companies sometimes sell or spin off side businesses specifically so they can be seen as pure plays and attract investors who want that focus.
In practice
Real-world examples.
Example
An investor wants to benefit from rising demand for lithium. She buys shares in a company that mines and refines only lithium, rather than a large diversified miner where lithium is a small part of earnings. Her investment now moves closely with the lithium price.
Example
A conglomerate decides to spin off its software unit as a separate listed company. The new business trades at a higher multiple than the group did, because investors can now value the software business on its own. The parent's remaining businesses are also easier to analyse.
Example
A valuation analyst needs to value the cloud division of a larger group. She selects five listed pure-play cloud companies, calculates their average multiple of enterprise value to revenue, and applies it to the division's revenue. The pure plays give a cleaner benchmark than the parent group.
Formula
Calculation
Core revenue share = revenue from the core activity / total revenue x 100
Suppose a company has total revenue of $50,000,000, of which $45,000,000 comes from its main product line and $5,000,000 from a side service. Core revenue share = 45,000,000 / 50,000,000 x 100 = 90%. Many analysts would call this business a pure play. If the company later sells the side service, core revenue share rises to 45,000,000 / 45,000,000 x 100 = 100%.Case study
Seen in the real world.
Sunvale Energy is an illustrative, fictional company that sold both solar panels and home heating oil. The two businesses had different customers, different cycles and different risks, and the share price traded at a discount to peers in each sector. Analysts struggled to compare it with anyone.
The board decided to sell the heating oil business for $60,000,000 and focus entirely on solar. The remaining company became a pure play, with 100% of its revenue from solar products. It used some of the proceeds to repay debt and the rest to expand production.
Over the following year, the illustrative effect was that investors who wanted solar exposure bought the shares, and the valuation multiple rose to match solar peers. The risk was that the company was now fully exposed to one market, so a downturn in solar demand would hit it harder than before.
Watch out
Common mistakes.
- Assuming a pure play is safer than a diversified company, when its concentration actually makes it more exposed to a single market.
- Calling a company a pure play based on its marketing, without checking how much revenue and profit really come from the core activity.
- Using a diversified group as a valuation comparison for a single business, when a true pure play would give a cleaner benchmark.
Questions
People also ask.
Why do investors like pure plays?
They give direct exposure to one theme or industry, which lets investors build their own mix of exposures rather than relying on a company's mix.
Can a large company be a pure play?
Yes, because the term describes focus on one activity rather than size, so a large airline or payments firm can qualify.
What is the opposite of a pure play?
A conglomerate or diversified company, which operates several unrelated businesses under one roof.
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