======Addressable Market======
Addressable Market (often used interchangeably with its most common variant, [[Total Addressable Market]] or TAM) represents the maximum annual revenue a company could possibly generate from a specific product or service if it achieved 100% market share. In simple terms, if a company sells pizza, its TAM is the total amount of money spent on all pizzas, by everyone, everywhere they could theoretically operate, in a single year. It’s the entire pie. For a [[value investing]] practitioner, grasping the size and trajectory of this market is crucial. It’s not just a lofty, abstract number; it’s a direct indicator of a company's runway for growth. A vast and expanding market provides a powerful tailwind, making it easier for a business to grow its sales and profits over time. Conversely, a small or shrinking market can severely limit the potential of even the most innovative company, making long-term growth an uphill battle.
===== Why Does the Addressable Market Matter to an Investor? =====
Understanding the addressable market is fundamental to assessing a company's long-term potential. It helps answer one of the most important questions an investor can ask: **How big can this company get?**
A company with a small, saturated addressable market is like a big fish in a small pond—it has little room to grow. A company with a large and expanding addressable market, however, is like a small fish in a vast ocean. It has a long runway to increase its revenue and profits for years, or even decades, to come. This potential for sustained growth is a key ingredient in finding "compounder" stocks that can generate exceptional returns over the long haul. Analyzing the market size is a core component of evaluating a company's [[competitive advantage]] and forecasting its future [[cash flow]], which are the ultimate drivers of its intrinsic value.
===== The 'TAM, SAM, SOM' Framework: Peeling the Onion ====
While the Total Addressable Market (TAM) is a great starting point, it's often unrealistically large. To get a more practical picture, analysts break the market down into smaller, more relevant segments. Think of it as moving from the entire pie to the slice you can actually eat.
==== Total Addressable Market (TAM): The Whole Pie ====
This is the big-picture, global demand for a product category. It assumes no geographical, regulatory, or logistical barriers.
  * //Example:// For a company that makes electric bikes, the TAM would be the total global spending on all types of bicycles (electric, road, mountain, etc.) each year. It’s the theoretical maximum.
==== Serviceable Addressable Market (SAM): Your Slice of the Pie ====
The [[Serviceable Addressable Market]] is the segment of the TAM that a company's products or services can actually target. It is constrained by factors like geography, language, regulation, and the company's specific product fit.
  * //Example:// If our electric bike company only operates in North America and sells high-performance models, its SAM is not the global bike market. It's the annual spending on high-performance electric bikes within North America. This is the company's "addressable" hunting ground.
==== Serviceable Obtainable Market (SOM): The Bite You Can Realistically Take ====
Also known as the Share of Market, the [[Serviceable Obtainable Market]] is the portion of the SAM that a company can realistically capture in the near term (e.g., 3-5 years). This calculation accounts for the company's current resources, strategy, and, most importantly, its competition.
  * //Example:// Given the intense competition from other brands and its current marketing budget, our electric bike company might realistically aim to capture 10% of its SAM in the next few years. This SOM figure is the most useful for near-term financial modeling and [[valuation]].
===== A Value Investor's Checklist for Market Size =====
A smart investor treats market size estimates, especially those from the company itself, with a healthy dose of skepticism. Here’s a quick checklist to guide your analysis:
  * **Question the Narrative:** Companies have a strong incentive to present the largest possible TAM to attract investors. Always ask, "Is this realistic?" Prefer a conservative [[bottom-up analysis]] (e.g., estimating the number of potential customers x average annual spending) over a broad [[top-down analysis]] (e.g., taking a percentage of a huge industry report).
  * **Look for Tailwinds:** Is the market itself growing, stagnant, or shrinking? A company swimming with the current (a growing market) has a much easier path to success than one swimming against it.
  * **Market Share vs. Market Growth:** Is the company growing by stealing [[market share]] from competitors in a mature market, or is it growing because the entire market is expanding? Growth in an expanding market is often more sustainable and less costly to achieve.
  * **Profitability is King:** A massive TAM is meaningless if it's a "red ocean" of brutal competition where no one earns a decent profit. A company that dominates a smaller, profitable niche with strong [[pricing power]] can be a far more attractive investment than a tiny player in a huge, low-margin industry. The goal is to find profitable growth, not just growth at any cost.