Analyze a Blue Chip with Network Effect You Own

Action of the week

Background: Businesses benefiting from network effects often experience rapid growth after reaching a critical mass. As the network approaches market saturation, the user growth rate declines. Thereafter, if network usage continues to intensify (e.g. more purchase transactions, page views, streaming time per user), revenues can keep growing, albeit at a lower rate.

Rationale: When evaluating the growth prospects for blue chips with network effects, investors must assess the network growth trajectory (current market penetration, current user growth rate) and potential usage expansions.

Action: For a blue chip with network effects that you own, estimate the network growth trajectory and the potential for expanded usage.