Charting the trillion-dollar TAM wars

Per WSJ:

SpaceX’s record-breaking IPO tested the limits of an obscure financial metric. Anthropic’s could push it even further.The maker of Claude is likely to tell investors its potential revenue opportunities are above $30 trillion, topping SpaceX’s $28.5 trillion estimate, according to people familiar with the matter.Tech startups or other growing companies going public often estimate their “total addressable markets,” or TAMs, to show investors they have ample room to grow. Such figures estimate the amount of annual revenue a company could theoretically capture if it achieved 100% market-share using inputs ranging from industry data to bankers’ models.While they have always involved a bit of guesswork, these estimates are especially squishy when it comes to trying to predict how the rapid adoption of artificial intelligence will upend entire industries.Elon Musk’s rocket maker called its TAM “the largest actionable” market in “human history” when it revealed the figure in a May filing. Most of the figure, $26.5 trillion, was attributed to opportunities in AI.

SpaceX’s record-breaking IPO tested the limits of an obscure financial metric. Anthropic’s could push it even further.

The maker of Claude is likely to tell investors its potential revenue opportunities are above $30 trillion, topping SpaceX’s $28.5 trillion estimate, according to people familiar with the matter.

Tech startups or other growing companies going public often estimate their “total addressable markets,” or TAMs, to show investors they have ample room to grow. Such figures estimate the amount of annual revenue a company could theoretically capture if it achieved 100% market-share using inputs ranging from industry data to bankers’ models.

While they have always involved a bit of guesswork, these estimates are especially squishy when it comes to trying to predict how the rapid adoption of artificial intelligence will upend entire industries.

Elon Musk’s rocket maker called its TAM “the largest actionable” market in “human history” when it revealed the figure in a May filing. Most of the figure, $26.5 trillion, was attributed to opportunities in AI.

Public markets have suffered two acute outbreaks of TAM. The first, beginning in the late 1990s, was when electronics makers wanted a way to describe the potential scale of demand for router switches, set-top boxes and hard disk drives. The second, beginning in the mid 2010s, was when all sorts of companies adopted tech industry argot in an effort to be valued like growth stocks.

Bank analysts did most of the hype work in the first wave. It wasn’t until the second wave that companies became confident enough to TAM themselves. To illustrate the trend, here’s a corporate confetti cannon:

Of course TAM is silly. We won’t patronise you by explaining the myriad ways it’s silly. But it’s also useful, because it can’t be taken seriously.

There’s a legal requirement, in the US and elsewhere, for a company’s financial projections to be clearly defined and presented in good faith. But TAM is an estimate, not a projection; it’s a guess at the size of a market over the long term, based on the impossibility of the company taking the whole pie rather than just a slice.

A big TAM gives companies with no earnings and strong revenue growth the opportunity to pretend to be the next Amazon without explicitly promising to become Amazon. No matter how absurd the total, it’s very unlikely to be viewed as fraudulent misrepresentation. It’s not a target to hit. It’s a hypothetical for maybe growing into.

As a New York district judge explained last year, when throwing out a class-action suit against Adobe over its abandoned plan to buy competitor Figma, “no reasonable investor would understand Adobe’s TAM figures to represent that share of the market that Adobe would actually capture.”

Unrestrained by reality in an attention economy, TAM inflation is the inevitable consequence. The chart below shows some companies whose market size estimate pre-IPO topped a trillion dollars. All but two are from this decade, and one of those is WeWork:

Headline figures only tell part of the story. For example, Reddit’s 2024 IPO filing gives a $1.4tn total market value by 2027 for digital advertising (excluding China and Russia). But it also suggests it could licence its data into a $1tn AI market and tap into a $2.1tn “User Economy” market, by which the message board operator means the total volume of commerce through its platform.

By the broadest possible definitions, Reddit’s all-in TAM estimate of $4.5tn would be bigger than Japan’s nominal GDP. Reddit’s revenue last year was $2.3bn, or 0.05 per cent of that total.

Given everything, we probably don’t need to demonstrate that a big TAM is a poor predictor of post-IPO share price performance. Here you go anyway:

And TAM guidance doesn’t just generate unjustified hype. The measure is just as useless in the other direction. Here, for example, is a slide from Nvidia’s 2018 investor day presentation:

Seven years later, Nvidia had captured more than 400 per cent of its estimated total addressable market.