Pure Play Meaning Examples Ecommerce Retailers What Is It

Pure Play Meaning

The financial statements and market performance of such companies are easy to understand. So, it is easy for investors to follow, perform fundamental analysisFundamental AnalysisFundamental Analysis (FA) refers to the process of studying any security’s intrinsic value with the object of making profits while trading in it. The primary purpose of fundamental analysis is to determine whether the security or stock is undervalued or overvalued and thereby make an informed decision to buy, hold, or sell it in order to maximize the potential for gains.read more and make investment decisions. Furthermore, the pure play technique can be used in tandem with the capital asset pricing modelCapital Asset Pricing ModelThe Capital Asset Pricing Model (CAPM) defines the expected return from a portfolio of various securities with varying degrees of risk. It also considers the volatility of a particular security in relation to the market.read more to assess the cost of equityCost Of EquityCost of equity is the percentage of returns payable by the company to its equity shareholders on their holdings. It is a parameter for the investors to decide whether an investment is rewarding or not; else, they may shift to other opportunities with higher returns.read more for a multidivisional firm’s specific unit or division. It is done by deriving the beta of a public firm with operations similar to the division.

Key Takeaways

Pure play refers to a company that concentrates on one type of product, service, business, or industry. Examples include entities owning a chain of coffeehouses and online retailers devoid of physical stores.Unlike diversification strategies or conglomerates generating revenue from multiple categories, its features reflect a single business approach and concentration growth strategies.Advantages include reduced complexity, analysis of beta coefficient, and ease of doing fundamental analysis. However, the lack of diversification points to the risk element in the model.Certain investors focus on identifying and following companies exhibiting a narrow focus or following a specific industry.

Pure Play Explained

Pure play companies follow a specific industry, products, or section of clients, and factors like industry development significantly influence the company’s performance, market shareMarket ShareMarket share determines the company’s contribution in percentage to the total revenue generated within an industry or market in a certain period. It depicts the company’s market position when compared to that of its competitors.read more, and growth. They concentrate on their product or service offering by investing more resources and effort to win customer loyalty and expand the market share resembling a concentration growth strategy. However, a business that started by focusing on one product or industry may expand later. At the same time, a conglomerate can sell its different subsidiaries to focus on its main business line.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Pure Play (wallstreetmojo.com)

Focusing on a single type of product or service is often perceived as risky compared to conglomerates that spread risk through diversification strategy. For example, companies owning a chain of movie theatres in the entertainment industry were affected by negative revenue during Covid 19 pandemic because the government imposed restrictions on cinemas and movie theatres. However, deploying streaming services accelerated from the pandemic experience can help the company lessen the impact of losing key markets by ensuring revenue from alternate options.

It is a common term among stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more participants. They use it to segregate listed companies focusing on a single line of business. When such companies get listed, the news turns buzzworthy. One of the examples is associated with the company DNEG. It is a London-based motion picture visual effects, computer animation, and stereo conversion company established in 1998. The definitive business combinationBusiness CombinationA business combination is a type of transaction in which one organization acquires the other organization and therefore assumes control of the other organization’s business activities and employees. In simple terms, it is a consolidation of two or more businesses to achieve a common goal by eliminating competition.read more agreement between DNEG and Sports Ventures Acquisition Corp. (Nasdaq: AKIC), a publicly-traded special purpose acquisition companySpecial Purpose Acquisition CompanyA Special Purpose Acquisition Company (SPAC) refers to an entity with no commercial operations but intends to merge with or acquire an existing business.read more, will result in DNEG becoming a public company and the only pure play publicly traded visual effects and animation company. Accordingly, the company will be renamed DNEG, and the ordinary sharesOrdinary SharesOrdinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working. Such shares carry voting rights and are shown under owner’s equity in the liability side of the balance sheet of the company.read more will get listed on NASDAQ.

The venture capitalist is another example revealing the need to understand the narrow focus of this strategy. Venture capitalists can position themselves as a pure play or diversified conglomerateConglomerateA conglomerate in business terminology is a company that owns a group of subsidiaries conducting business separately, often in distinct industries. It reflects diversification of operations, product line and market to allow business expansion.read more through their cumulative portfolios, overseeing the various firms they invest in while also undertaking portfolio optimizationPortfolio OptimizationPortfolio optimization refers to the strategic process of making improvements or positive changes to the investor’s portfolio containing various assets. The Sharpe ratio helps to analyze the returns from an optimal portfolio.read more. If a VC opts for a “pure play” style, it optimizes venture capitalVenture CapitalVenture capital (VC) refers to a type of long-term finance extended to startups with high-growth potential to help them succeed exponentially. read more engagement, and VC is called a specialist investor. In contrast, if VC selects a broader “firm” level diversification strategy, it reduces portfolio risk or possible losses, and the VC is called a generalist investor.

Example

Lennar Corp was founded in 1954, an American home construction company headquarters in Fontainebleau, Florida. In 1972, it became a public company via an IPO and was listed on NYSE. Apart from catering to residential building construction, the company takes part in other industries, like they also have activities related to credit intermediation.

In 2021, Lennar Corp revealed its plan to spin off certain businesses to concentrate on its role as a homebuilder and financial services company. Lennar Mortgage Finance, the company’s commercial mortgage business, and the technology investment business are among the divisions subject to the spin-off. The spun-off enterprise’s asset base will be between $3 billion and $5 billion, with no debtDebtDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.read more.