Follow the money instead with the new TMM—Total Monetizable Market

The concept of Total Addressable Market, or TAM as it is popularly called, has taken the business world by storm in recent years.  Back in October 2020, the Financial Times (FT) in an article, “The total addressable market craze is detached from reality,” cautioned about the burgeoning trend among “companies using the term in their pre-IPO S-1 filings relative to the past five years.”  A related graph depicted TAM references exploding from under 5 in 2016 to almost 50 in the first nine months of 2020.  FT’s point was that investors and analysts are increasingly buying into seemingly unlimited market opportunities without seriously questioning the reality of their associated TAMs.

Then there was a Yahoo Finance article, “Large Addressable Market Gives Palantir Plenty of Upside,” of January 15, 2021 promoting the stock of Palantir (PLTR) by suggesting “the total addressable market for the company is $119 billion” without linking to the source—Seeking Alpha—that it had used to quote an enormous TAM number.  If I were seeking alpha, wouldn’t I want to verify my sources—especially relating to TAM, as it is increasingly cited by the business media these days?

The Motley Fool in its January 27, 2021 article “Shopify Has Yet to Tap Its Massive Addressable Market,” began by stating, “One of the reasons that I loved Shopify is because it has a massive addressable market.”  Sounds exciting but not very convincing when it then draws this cavalier conclusion:

“So I think that not only do you have the $78 billion in the small- to medium-sized business market, but then there’s another untold billions of dollars worth of potential market share that they could get in the enterprise-level businesses. This just really does show, I mean, that’s a huge potential market going forward…”

TAM—another darling of Wall Street that doesn’t jibe with Main Street.

Yes, that’s a lot of TAM—all of SMB and enterprise— but, by definition, it is not all monetizable by Shopify alone.  Because there will be addressees that—don’t want to buy from Shopify or can’t be targeted by Shopify—are simply not monetizable.  But then in the business world, a tiny slice of the pie is never as tempting as the whole enchilada.  Especially, when one wants to attract investors from Menlo Park to Wall Street, who often seek these unreal TAM estimates in order to justify their investment decisions.  

It could be one of the reasons that retail investors on Main Street recently revolted against other valuation classics relied upon by institutional investors, such as, stock fundamentals and technical analysis.  In an archetypal David vs. Goliath matchup, retail investors—using the increasingly popular Robinhood mobile trading platform—crashed the traditional trading framework of major hedge funds by pursuing a sustained short squeeze of selected stocks.  On February 3, 2021, InvestorPlace in its report, “5 Top Reddit Stocks To Sell After The Short Squeeze,” warned investors not to be “be left holding the bag when these Reddit stocks come crashing down.”  Coincidentally, that BAG included Bed Bath & Beyond (NASDAQ:BBBY), AMC Entertainment (NYSE:AMC) and GameStop (NYSE:GME)—three of the most wildly inflated stocks in, what is now referred to as, “the Reddit trade.”  This “short” digression serves only to make a point about how institutional valuation methods are being challenged by the little guys—who could set their sights on TAM, next, by questioning its validity in market valuations.

The TAM sham exposed.

So, whether one estimates TAM using a top-down, bottom-up or value-theory methodology, the heart of the problem is in “addressable,” which is invariably a pipe dream.  To be fair, there are quantifiable measures to make TAM more realistic by qualifying it into subsegments such as, serviceable available market (SAM) and serviceable obtainable market (SOM).  So, SAM becomes a subsegment of TAM that is targeted within the geographical reach of one’s product and/or service and SOM, in turn, becomes a percentage of SAM that one can credibly capture.  But these measures are a far cry from TAM, which is still used as the shiny investment object.    

Again, how often does anyone hear about SAM and SOM in investment pitches covered by the business media?  It’s TAM, TAM, TAM all of the time!  TAM is what gets attention—because the unachievable Total Addressable Market is so much bigger, better and exciting!  Why?  It’s what captures the imagination, it’s what drives investment and it’s what makes the money flow.  Reality be damned!  This TAM sham, as it were, is especially popular among startups and high-tech newbies in their fund-raising efforts with venture capitalists, private equity firms and the like.  

Moving from addressable to monetizable—Total Monetizable Market.

Quite clearly, in the real world of monetizable markets, the focus needs to be on SOM—but it’s already been deemed a loser just going by its lack of exposure in the media.  SOM is akin to getting into the weeds of a business model and the related probability of capture—thus rendering it boring at an executive level in the boardroom and kind of SOMber detail when it comes to capturing eyeballs in visual media.  But for the sake of truth in investing, business analysts need to defocus from TAM and refocus on SOM in financial plans.  However, it’s got to be rebranded under a new, more meaningful acronym, such as, TMM—Total Monetizable Market.  To make TMM the new SOM, i.e., the new king of the world for business executives and investment gurus, let’s take a look at a few key differentiators between TAM and TMM:

*Marketing Automation Platform 

The above table makes it clear in succinct terms that TMM is a more accurate reflection of the achievable market by a business.

Parting ode: TAM-I-Am.

So, it’s clearly time to put the kibosh on TAM and replace it with TMM.  Change is difficult to accept, so let me conclude my case for TMM with a little humor.  With apologies to Dr. Seuss, here’s my parting shot at TAM:

I am TAM. I am TAM. TAM-I-Am.

That TAM-I-Am! That TAM-I-Am! I do not like that TAM-I-Am!

Do you like startups and TAM?

I do not like them, TAM-I-Am.

I do not like startups and TAM.

Would you like them in pitches or plans?

I would not like them in PowerPoint pitches or business plans.

I would not like them in any IPO exit stands.

I do not like startups and TAM.

I do not like them, TAM-I-Am.

“Show me the money” redux with TMM.

Rest in peace, TAM!  TAM has had a good ride, but now it’s time to turn the spotlight on TMM.  “Show me the money” has long been a popular refrain going back to Tom Cruise’s 1996 movie, “Jerry Maguire” to today’s Mr. Wonderful on the TV show, “Shark Tank.”  TMM does exactly that—it shows investors the total money (revenue) that a business can actually realize, as opposed to the total money (sales) that it can naively keep hoping for.