I would like to add a thought regarding one reason why capital intensive companies are undesirable. Namely the risk of that investment becoming stranded and trapped. Or obsolete. A steel mill is very illiquid and may be salable if it is currently profitable. But after the capital allocation decision is made, the firm will either recoup its investment through cash earnings making steel or not. The worst outcome for an investor is that the firm earns a marginal profit on sales, but fails to cover depreciation. These firms can lose money seemingly forever.
Equipment rental has high capital expenses but little chance of those investments becoming trapped. Equipment is bought to be sold, with preplanned schedules for sales, multiple customers, etc. Not without risk, but not they aren't buying blast furnaces.
Depends on the goal actually.
Asset light businesses are superior in terms of growth thus they can increase your portfolio value rapidly, though they are more open to disruption.
If you are looking for just above market returns consistently, than the dominant asset intensive business will likely do the job.
Of course it depends on the goal. Asset-light businesses have lower barriers of entry, so the disruption potential is higher, I agree.
Super interesting! Great analysis.
Thanks, I'm glad you found value in it!
I would like to add a thought regarding one reason why capital intensive companies are undesirable. Namely the risk of that investment becoming stranded and trapped. Or obsolete. A steel mill is very illiquid and may be salable if it is currently profitable. But after the capital allocation decision is made, the firm will either recoup its investment through cash earnings making steel or not. The worst outcome for an investor is that the firm earns a marginal profit on sales, but fails to cover depreciation. These firms can lose money seemingly forever.
Equipment rental has high capital expenses but little chance of those investments becoming trapped. Equipment is bought to be sold, with preplanned schedules for sales, multiple customers, etc. Not without risk, but not they aren't buying blast furnaces.