Balancing between market share, stock prices

Arnav Pandya, TNN Jun 7, 2007, 12.46am IST

Competition is the hallmark of a thriving economy. Companies compete with each other to garner more market share and increase shareholder value.

While growing organically is always an option, companies garner more market share through mergers or tie-ups with their competitors. Though such moves result in a higher market share, they can have a completely different impact on stock prices.

What is meant by market share?

Market share refers to the extent of a particular market controlled by an entity or a group or a brand. Sales figures are most commonly used to define the market share. Sales figures give an indication of the extent of power that a particular brand or company holds in a specifically defined market in terms of the sales that come to that particular brand or company.

Why is market share important?

Larger market share naturally makes a company the market leader. It not only improves the image of the company it gives a company the ability to charge higher prices and thereby make more profits. Often a higher market share leads to economy of scale and consequently benefits in terms of saving costs in operations for companies. Little wonder that companies squabble over claims to control a higher market share.

What is the relation between market share and stock price?

The stock market is concerned with various developments that affect the financial performance of a company. The earnings per share, along with various other ratios, is an important tool for stock evaluation. In such a situation a higher market share is often indicative of the fact that the sales of a company are going higher and there is an expectation that this will lead to more profits and consequently it can result in an improvement in the share price.

Though a market leader maintaining its market share may not have an immediate impact on the stock price as it could have been factored into the stock price, news of an improvement in the market share figure could lead to a rise in the price.

What is the relation between market share and profitability?

The most important factor in the entire evaluation of the market share and price equation is the impact on the profits of the company. If higher market share leads to higher profits, then the equity markets will show an improvement in stock price. A company must look at the final impact of the entire market share race and then evaluate the way in which it is going forward.

This is the reason that many companies prefer to sell their products to a niche audience, which might not lead to a high market share but is good for the profitability of the company.

Is there a negative impact of high market share?

If the quest for higher market share leads to losses, then a company would actually be better off by making lower sales or having a lower market share because it will reduce the losses. In such a situation, a high market share can become a liability.

However, there are instances where companies consciously incur losses, to gain market share. They can count on this market share later, to earn profits.