What made Shaving Worth more than $50 Billion
Mohamed is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the early 1890s a salesman by the name of King Gillette Camp had a Brilliant idea . At the time he was working for the Crown Cork and Seal Company (NYSE: CCK) which invented the crown cork. Bottles sealed with crown corks could not be resealed and were thrown away, therefore generating more revenues for the company he worked for. At the time Razors were considered a durable good which you kept for a long time and you would send to be resharpened when the blades dulled. King Gillette thought to himself why not just make a razor in which you could dispose of the blade easily when it gets dull and just go buy a new one instead of going through the hassle. From then on the The Gillette Company was born and that's were the term razor/blade buisness model came from.
Now King Gillette might have been a Utopian socialist and whose work possibly could have inspired the name of Superman’s city but he came up with an idea that makes money for a lot of capitalist corporations today.
A razor blade business model as I define it is one in which a company produces a product whose use depends on other complimentary products it produces and which are often sold at high margins. The primary product does not have to be cheap, or free, or sold at a loss as is commonly believed. If a company can effectively sell its primary product at a high price either through brand, or patents, or barriers to entry, and make a profit while enjoying considerable market share then this is the best case scenario and you know what they say “two profits are better than one.” Gillette itself had a very expensive razor priced at $5 during the life time of its patents in the early 1900s.
In 2005 Gillette was bought by Proctor and Gamble (NYSE: PG) for $57 Billion
So what other emerging industries use this powerful model today?
Two companies that employ the Razor and Blade model are Intuitive Surgical (NASDAQ: ISRG) and Mako Surgical (NASDAQ: MAKO). ISRG produces the Da Vinci Surgical System used mainly in Prostatectomy and Hysterectomy and Mako produces the RIO system used in hip and knee replacement surgery called MAKOplasty.
The Da Vinci and RIO surgical systems are state of the art medical systems in which a doctor’s natural hand movements are performed on a console with a high performance vision system and then translated into micro movements on the patient by the system's instruments operating on the patient.
These systems allow doctors to perform surgeries with a level of precision not possible before and improve the important ratio of procedure effectiveness/ procedure invasiveness. This makes patients prefer hospitals with these systems and forces other hospitals to install them.
Every RIO and Da Vinci system will generate a great deal of recurring revenue throughout its lifetime through disposable products that allow the system to function such as Da Vinci's EndoWrist accessories and instruments and Mako's RESTORIS implants and through entering service contracts for their systems. Therefore the more procedures done, the more revenue the company earns.
This recurring revenue represented 58% of ISRG’s revenues and 70 % of Marko’s revenue in the first quarter in 2012 noting that Mako had an exceptionally weak quarter for Rio System sales .
ISRG, being the older company is the more established of the two with a total of 2,226 installed Da Vinci systems worldwide. ISRG is an example of what Mako may one day become. Mako is still unprofitable and only has a world wide installed base of 118.
ISRG has still alot of room to grow as more hospitals adopt its Da Vinci system especially outside the US. The number of Da Vinci systems sold in Q1 2012 increased Quarter on Quarter. As the installed base of Da Vinci systems increases, revenues and earnings will grow exponentially since each machine produces more revenue over its lifetime than its original selling price.
Mako is a riskier company that is yet to make a profit however it is fairly similar to its older counterpart ISRG and the price of its stock has dropped significantly due to slower than expect RIO sales in Q1 2012. Despite this, the number of MAKOplasty operations performed were up 76% in Q1 2012 which is a very positive indicator.
The 2nd Industrial Revolution
If Mako and ISRG are going to change how we do surgery, well there are another two companies that may change how we do, well, everything!!! I am talking about 3D systems (NYSE: DDD) and Stratasys (NASDAQ: SSYS).
3D systems and Stratasys are the leaders in the 3D printing industry. What is the 3D printing industry? Well think of your printer at home, but instead printing actual 3D objects.
3D printers are used in a wide array of applications and have been used in everything from crafting simple artwork to creating parts for the USAF. The technology however is still in its infancy and should advance rapidly in the coming decades.
2D Printing has always been a razor blade model and 3D printing is no different. You have to buy materials for the printers to operate just like you buy paper and ink for a regular printer. They also get revenues from servicing their printers through either providing custom parts or performing maintenance. The number of printer units sold increased by 153% for 3D systems and 44% for Stratasys.
What makes these companies great however is the fact that they are already profitable. These aren’t some Sci-Fi futuristic companies that aren’t making any money. They are actually making money way before their full potential has been realized.
Think of it as investing in Microsoft in 1986 or Intel in 1971 or Cisco in 1990. These companies can provide some serious returns over time if they realize their full potential. At a 48 P/E and 50 P/E for DDD and SSYS respectively, they have a very high valuation, but just like William O’Neal of CANSLIM investing would say the best stocks in the market don't come cheap!!!
The future is likely to be mobile. Tablets and smart phones are expected to take over the PC and laptop markets in the future and we are going to consume on them a lot of music, books, movies, magazines, and more importantly apps which are replacing computer programs. There are currently two companies that dominate the Smart phone market which are Apple (NASDAQ: AAPL) and Samsung. You can add to them Amazon (NASDAQ: AMZN) for tablets.
While Smart phones and tablets are different in that they don't require secondary product purchases to function as the products we discussed above, still a large number of people are likely to purchase these items to improve their user experience or why else would they purchase an expensive smart phone or tablet. A tablet purchased as an e reader however is strictly a razor/blade product since it is worthless without the e-books.
Take a look at how the market for Mobile Apps is expected to grow
Figure: Mobile App Stores Revenues 2011-2015 source Canalys Estimates
Apple makes a lot of money through sales of its devices and it sells a lot of them and I mean a lot! Last Quarter 35 million iPhones and 11.8 million iPads were sold. Each of these devices can generate even more revenue through the Apple App store and iTunes and iBook store.
Amazon however makes a loss on every kindle it sells, however they make up for it through content on their kindles. The Amazon App Store is right behind Apple in generating revenues per daily user and is way ahead of Google play
The Amazon kindle is also the dominant e-reader. Amazon has over a 60% share of the e-book market and its kindle e-books started out selling hard cover books on it site years ago.
I am very bullish on Apple and I believe it will make history by being the first company to achieve the milestone of a trillion dollar market capitalization.
Not everyone would agree on Amazon however. I believe its too expensive at the moment to be considered a good investment others may disagree and consider it to be one of the best stocks in the market. You decide for yourself
These companies could see very strong growth in the future. They all have been increasing the number of primary products sold in recent years and cementing their position in the market which serves as a barrier to entry for the competition. If these companies continue to increase their installed base of primary products, then future sales of complementary products will greatly increase these companies profitability and EPS and reward shareholders.
Eliteinvesting has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, 3D Systems, Intuitive Surgical, and MAKO Surgical and has the following options: short AUG 2012 $30.00 calls on 3D Systems. Motley Fool newsletter services recommend 3D Systems, Amazon.com, Apple, Intuitive Surgical, and MAKO Surgical . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.