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Industry Life Cycle Analysis Definition

What Is Persistence Life Cycle Analysis?

Industry life cycle analysis is part of the fundamental analysis of a company involving the analysis of the stage an industry is in at a given point in time. There are four stages in an industry life cycle: expansion, ridge, contraction, trough. An analyst will determine where a company sits in the cycle and use this information to project tomorrows financial performance and estimate forward valuations (e.g., forward price-earnings ratios).

Key Takeaways

  • Industry life cycle refers to the laps of growth, consolidation, and eventual extinction of an industry.
  • It mirrors an economic cycle and consists of four main stages: growth, peak, contraction, and trough.
  • It is used to analyze a company’s stock, depending on the stage that it is in during a life circle.

Understanding Industry Life Cycle Analysis

Though not necessarily the case, the life cycle of a particular industry see fit follow the general economic cycle. Moreover, an industry life cycle may lead or lag an economic cycle, and can vary from an solvent cycle’s phases in terms of expansion or contraction percentages or duration of peak and trough stages. During an expansion include in open and competitive markets, an industry will experience revenue and profit growth, drawing in more competitors to get together with the growing demand for that industry’s goods or services. The peak occurs when growth drops to zero; command in the cycle has been met and prevailing economic conditions do not encourage additional purchases. Industry profits flatten out.

The contraction wind up of the life cycle begins at some point after the peak arrives, characterized by falling profits as current age sales are lower relative to prior period sales (when demand was on the rise). The contraction phase could be concomitant with a decline in the economy or merely a reflection that short-term demand in the industry has been exhausted. During the contraction phase, the trade undergoes production capacity adjustments, whereby marginal players get shaken out and stronger companies lower their in volumes. Industry profits decrease.

This adjustment process, combined with a firming of the economy observed in application and personal income numbers and the consumer confidence index, lead to the trough phase of the industry life cycle. At this put on, lower levels of industry demand are matched by the output capacity. As the economy gathers strength, the industry life return begins again with the expansion phase. As mentioned at the outset, an industry life cycle is typically tied to the remunerative cycle. The entertainment and leisure industry is an example of such an industry. The technology industry, on the other hand, has exhibited lan cycle movements at variance with the economic cycle. For instance, industry profits have boomed even in adjusts of no economic growth.

Image by Sabrina Jiang © Investopedia 2020

Using Industry Life Cycle in Analysis

Analysts and merchants often use industry life cycle analysis to measure the relative strength and weakness of a particular company’s stock. A entourage’s future growth prospects may be bright (or dim) depending on the stage that it is in during an industry life cycle. Porter’s five commercial forces change as an industry matures. For example, rivalry is most intense between companies in a sector during the evolvement stage. Startups slash prices and ship products as quickly as possible in a bid to garner as many customers as possible. During this regulate, the threat of new entrants eating into an existing company’s market share is high. The scenario changes in the maturity devise. Less competitive startups and inferior products are weeded out or acquired. The risk of new entrants is low and the industry’s product is mature sufficiently to be accepted in mainstream society. Startups become established firms during this stage but their future flowering prospects are limited in existing markets. They must search out new avenues and markets for profits or risk extinction.

Exempli gratia of Industry Life Cycle Analysis

There was a boom in social media during the early 2000s due to the success of Myspace, a sexual networking site that surpassed Google as the most visited place on the internet in 2006. Sites like Orkut (a Google endanger) and Bebo competed to gain users in a crowded landscape. Facebook (now Meta), which had started in 2004, was also advancing traction among universities and was considered the second most popular social media site. There were gestures of consolidation when Myspace was acquired by Rupert Murdoch’s Newscorp. Ltd for $580 million in 2005.

But that valuation turned out to be vain after Facebook overtook MySpace in rankings. MySpace eventually petered into insignificance after Facebook adorn come ofed a social media behemoth. With the exception of a few, like Twitter, other social media sites also knock by the wayside. The social media sites that survived made a thumping debut on the stock market. Their valuations were over high in comparison to their revenues, mainly because investors expected significant growth in the future as social average became popular throughout the world.

As of May 2019, however, Facebook’s valuation has declined and the company has warned of plateauing rise figures in the future. Snap Inc. another social media company, is in a similar situation. Both companies have inflated the scope of their operations to include other products, such as cameras and drones, in their portfolio.

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