What Is Industry Life Cycle Analysis?

What Is Industry Life Cycle Analysis?

Let me explain what industry life cycle analysis is—it's a key part of fundamental analysis for a company, where you examine the stage an industry is in at any given time. There are four stages: expansion, peak, contraction, and trough. As an analyst, you'll figure out where a company fits in this cycle and use that to project its future financial performance and estimate forward valuations, like forward price-earnings ratios.

Key Takeaways

You should know that the industry life cycle covers the stages of growth, consolidation, and eventual extinction of an industry. It mirrors an economic cycle with four main stages: expansion, peak, contraction, and trough. I use it to analyze a company's stock based on its current stage in the life cycle.

Understanding Industry Life Cycle Analysis

Though it's not always the case, an industry's life cycle often follows the general economic cycle. It might lead or lag behind, or differ in the extent of expansion, contraction, or the duration of peaks and troughs.

In the expansion phase, in open and competitive markets, you'll see revenue and profit growth for the industry, drawing in more competitors to meet rising demand for its goods or services.

The peak hits when growth drops to zero; demand is satisfied, and economic conditions don't push for more purchases, so industry profits flatten out.

Contraction starts after the peak, marked by falling profits as sales drop compared to previous periods when demand was climbing. This could tie into an economic recession or just exhausted short-term demand. During this phase, the industry adjusts production capacity—marginal players get shaken out, and stronger companies cut back volumes, leading to decreased profits overall.

The trough comes from this adjustment, combined with improving economic signs like employment, personal income, and consumer confidence. Here, lower demand matches the reduced output capacity.

As the economy strengthens, the cycle restarts with expansion. As I mentioned, it's typically linked to the economic cycle—the entertainment and leisure industry is a good example of that tie-in. But the technology industry often moves differently; for instance, tech profits have boomed even without overall economic growth.

Using Industry Life Cycle in Analysis

Analysts and traders like me often turn to industry life cycle analysis to gauge the relative strength or weakness of a company's stock. A company's future growth could be promising or limited depending on its stage in the cycle. Porter's five economic forces shift as an industry matures.

For example, rivalry is fiercest during the growth stage, with startups cutting prices and rushing products to capture customers. The threat of new entrants is high then, eating into market share.

Things change in the maturity stage—less competitive startups and inferior products get weeded out or acquired. The risk of new entrants drops, and the industry's product gains mainstream acceptance. Startups turn into established firms, but their growth in existing markets is limited; they need to find new avenues or markets for profits, or risk fading away.

Example of Industry Life Cycle Analysis

Take the social media boom in the early 2000s, driven by Myspace, which even topped Google as the most visited site in 2006. Competitors like Orkut and Bebo vied for users in a crowded field. Facebook, starting in 2004, gained traction in universities and became the second most popular.

Signs of consolidation appeared when Myspace was bought by News Corp. for $580 million in 2005. But that value proved inflated as Facebook overtook it, and Myspace faded into obscurity while Facebook became a giant. Most other sites fell away, except a few like Twitter (now X). Survivors debuted strongly on the stock market with high valuations relative to revenues, thanks to expected global growth.

By May 2019, though, Facebook's valuation had dropped, and it warned of plateauing growth. Snap Inc. faced similar issues. Both expanded into new products like cameras and drones. As of December 2021, Facebook rebranded to Meta Platforms, developing new tech, which boosted its valuation again according to analysts and the company.

Is the Industry Life Cycle the Same As the Economic Cycle?

The phases share names—expansion, peak, contraction, trough—and might overlap, like an industry's peak matching an economic peak. But it depends on the industry; some peak during economic troughs or expand when the economy is at its peak.

What Is the Product Life Cycle?

The product life cycle focuses on how specific products or services develop and reach the public, with five phases: development, introduction, growth, maturity, and decline. It's distinct from the industry life cycle, as multiple products can emerge within one industry or company.

What Are the 3 Main Parts of Industry Analysis?

When you perform industry analysis, look at three things: the overall appeal of the industry to customers and investors; factors determining a company's success or failure within it; and broader economic, political, and social forces influencing the industry.

The Bottom Line

The industry life cycle tracks the stages of growth and decline from creation to expansion and eventual extinction, mirroring the economic cycle's four stages. You can use this analysis to evaluate a company's stock, understanding why it's valued as it is and if that might change based on the industry's stage.