Investing is full of trade-offs, from great companies that are expensive stocks to O.K. companies that are cheap stocks. Maybe you found a company with amazing growth, but it’s generating losses. Or great earnings and a growing dividend but low growth in the underlying business. It’s also common to find companies and conglomerates with diversified business units and pure-play companies.
Pure-play companies have high exposure to one thing and try to do that thing well, whereas diversified companies try to do many things well. That will leave the diversified company better prepared to manage risk at the expense of dampening upside. But it also leaves the pure-play company better positioned to grow. Here’s why pure-play stocks can be such great investments but also risky, and why ConocoPhillips ( COP 0.69% ) could be a great buy now.
Pure play or not?
Some of the best stock investments over the last decade or two have been pure-play tech companies. Netflix ( NFLX 0.18% ) comes to mind. Its business plan essentially has been to reinvest all of its cash flow to produce more content so that it can attract new subscribers, have a high renewal rate, and raise prices. That strategy worked very well when there was a lot of growth potential.
But today, there’s much more competition in the streaming sector. For example, Amazon and Walt Disney participate in the streaming sector. But they aren’t pure-play streaming companies like Netflix.
Walt Disney is able to generate more lasting value from the content it produces than Netflix because Walt Disney has its theme parks, film franchises like Marvel and Star Wars, and a merchandise business that all benefit from its hit movies and shows. Similarly, Amazon has a library of films that people will likely continue renting over time. So in the case of streaming, the capital-intensive nature of producing content just to keep existing subscribers engaged, even though most of that content will soon go stale and have little to no residual value, is a case where being a pure-play streaming company today seems like a bad business model.
The Netflix example is worth pointing out because although streaming used to be a great pure-play investment, I would argue it’s better to go with Disney or Amazon now than Netflix.
Why ConocoPhillips is a great oil and gas company
The streaming discussion is important because it can show the dangers of operating a pure-play business model when competition rises and …….