Serviceable Available Market (SAM)

The Serviceable Available Market (SAM) is the slice of the total market pie that a company can realistically target with its current products, services, and business model. Think of it as the portion of the market that is a genuine fit for what the company sells, a crucial metric for any investor practising value investing. While the Total Addressable Market (TAM) represents the entire potential revenue opportunity if 100% of the market was captured, SAM is a much more practical and grounded figure. It filters the TAM by considering real-world limitations like geography, language, regulations, pricing, and specific product features that make the offering suitable for a particular customer segment. For an investor, SAM cuts through the hype of a massive theoretical market and reveals the company's actual, addressable customer base. It's the difference between “everyone in the world who eats” (TAM) and “everyone within our city who eats at vegan restaurants” (SAM).

To truly grasp SAM, it's best to see it as the middle layer of a three-part market analysis funnel. This framework helps you move from the wildly optimistic to the realistically achievable. Imagine you want to open a high-end, bespoke bicycle shop in Amsterdam.

• Total Addressable Market (TAM): This is the biggest, most optimistic number. It represents the total global demand for bicycles. It's a huge figure, but your little shop in Amsterdam can't possibly serve the entire planet. It’s fun for headlines but not for serious analysis.
• Serviceable Available Market (SAM): This is where reality bites. Your SAM is the portion of the TAM you can actually serve. In this case, it might be the annual spending on high-end bicycles by residents and tourists in the Amsterdam metropolitan area. You've filtered by geography (Amsterdam) and product type (high-end bikes). This is your true market potential.
• Serviceable Obtainable Market (SOM): Also called the Share of Market (SOM), this is the most realistic, short-term target. It's the piece of the SAM you can realistically capture in the first few years, considering your competition (other bike shops), marketing budget, and brand recognition. If the SAM for high-end bikes in Amsterdam is €50 million, you might realistically aim to capture 2% of that, making your SOM €1 million.

For a value investor focused on a company's intrinsic worth and long-term prospects, understanding SAM is non-negotiable. It's a powerful tool for cutting through management's rosy projections and getting to the heart of a business's potential.

A company's management might boast about a trillion-dollar TAM, but if their product only serves a tiny fraction of that market, the big number is pure fantasy. SAM grounds your analysis in the here and now. It answers the question: “What is the size of the playing field this company is actually on today?” A realistic SAM provides a solid foundation for forecasting future revenue.

Analyzing SAM forces you to think deeply about a company's niche and its competitive moat. Why can this company serve this specific market segment better than others? Does it have a unique technological edge, a beloved brand, or a regulatory advantage within its SAM? A strong company often dominates its SAM, even if that SAM is a small portion of the overall TAM.

SAM helps you evaluate a company's runway for growth.

• A company with a small share of a large and growing SAM has plenty of room to expand.
• A company that has already captured 80% of a stagnant or shrinking SAM may struggle to find new avenues for growth.

Estimating SAM isn't an exact science, but it's a vital exercise. There are two primary methods:

• Top-down analysis: You start with a large, established market size number (the TAM) from industry reports or market research firms. Then, you logically filter it down with assumptions based on the company's specific limitations. For example, you might take the total European software market (TAM) and narrow it down to the market for accounting software for small businesses in Germany (SAM).
• Bottom-up analysis: This is often more reliable but requires more work. You build the market size from the ground up. You identify the number of potential customers and multiply that by the average annual revenue you could expect from each. For example, (Number of small businesses in Germany) x (Percentage likely to use this type of software) x (Average annual price of the software) = SAM.

Remember, SAM, TAM, and SOM are all estimates. They are tools for thinking, not infallible truths. Companies can be notoriously optimistic in their own calculations. As a prudent investor, your job is to be a sceptic. Question the assumptions behind the numbers. Where did management get their data? Are their filters for geography or customer type reasonable? Always triangulate by looking at competitors' figures and independent industry analysis. A well-researched SAM is a sign of a disciplined investment thesis; a wildly inflated one is a major red flag.