The Power of Optionality And The Companies That Wield It

A company has a brighter future if it has multiple ways to grow – this is known as optionality.

Having options is an often underappreciated but valuable competitive advantage. Nassim Taleb, the author of the book, Antifragile, wrote, “An option is what makes you antifragile”.

Antifragile companies can thrive in times of chaos. But what constitutes optionality?

Optionality can come in the form of having opportunities to easily open up new business ventures. Think Amazon.com (NASDAQ: AMZN).

In its early days, Amazon was a first-party online retailer. At that time, all of its revenue came from selling products it bought and resold. But once Amazon built a substantial-enough user base, it easily pivoted its business into a marketplace and started generating revenue by providing services to third-party sellers to run their e-commerce business on Amazon’s marketplace.

Having the initial large user base gave Amazon the option to easily pivot into a marketplace.  That’s optionality.

As an investor, I often think about the options that a company has. Here are some examples of companies that I believe have the luxury of optionality.

Netflix Inc (NASDAQ: NFLX)

The streaming giant has built up an enviable catalogue of well-loved original content such as Stranger Things, Black Mirror, and more.

I believe Netflix can leverage this valuable intellectual property to grow revenues through selling merchandise, creating games, and even theme parks. Although these ideas may seem farfetched now, I think the possible options are exciting. To unlock all of these possibilities, Netflix’s management will need good execution and careful planning.

Besides original content, Netflix also commands a wide audience. That’s a valuable asset to own. At the moment, Netflix is laser-focused on its core offering of providing a great streaming service to its loyal user base. However, Netflix can easily upsell feature upgrades to its userbase in the future. Netflix has already announced that games could be included in a Netflix subscription in the future. If the introduction of games is a success, Netflix can have tiered subscription plans based on whether a user is willing to pay a higher premium for more of Netflix’s gaming services.

Upstart Holdings Inc (NASDAQ: UPST)

This fintech provides AI-powered software tools to banks that can better predict default rates on loans. Currently, Upstart is focusing on its core product of unsecured personal loans. Although this itself is a multi-billion dollar market (around US$84 billion), the bigger prize is in auto loans and home mortgages. Upstart’s AI tool could be leveraged to help banks make smarter loan decisions for both these markets.

With its purchase of Prodigy, a cloud-based automotive retail software provider, Upstart is already looking to grow into the auto loans market. The auto loans market is seven times the size of the unsecured personal loans market while the home mortgage market is multiple times larger than auto loans.

It is still early days for Upstart, but its pie could potentially grow much bigger if it is able to enter these new markets successfully.

Square Inc (NYSE: SQ)

Square started off by providing aspiring shopkeepers (the company calls them sellers) with a simple device that they can use to accept credit card payments. These square-shaped devices were much cheaper and easier to install than traditional card readers. 

After winning over users, Square leveraged on its seller base to upsell other software tools and to even provide loans to these sellers. 

But Square truly hit the gold mine when it released Cash App. This is a consumer-focused app for people to store money, transfer money to friends, and even directly deposit their wages into.

With a growing user base, Square has so many options to further monetiseCash App. Besides what has already been mentioned, Cash App also currently offers services such as investing, bitcoin trading, and debit cards. In the future, Square could roll out other services such as insurance, and buy now, pay later (BNPL). On BNPL, Square recently announced that it would be acquiring the Australia-based BNPL provider, Afterpay. The ability to roll out new features in Cash App is a valuable option that Square can easily take advantage of.

Coupang Inc (NYSE: CPNG)

South Korea’s e-commerce giant has already taken advantage of its gigantic logistics footprint in the country. From a 1st-party e-commerce player, Coupang now also acts as a third-party marketplace and delivers food and groceries.

There are many ways to grow its business, simply by offering new services to its third-party sellers to increase take rates, or to roll out new product offerings to its loyal consumer base by leveraging its logistics network.

With Coupang’s sprawling logistics infrastructure in South Korea in place, the options are abounding. But, Coupang is also careful in its spending. CEO Bom Kim said during the company’s recent 2021 second-quarter earnings conference call:

“We start with small bets, then test rigorously and invest more capital over time, but only into the opportunities we feel strongest about… …There are many other early-stage initiatives in the portfolio and I expect that we will not continue all of them. Only the investments whose underlying metrics show strong potential for meaningful cash flows in the future will earn their way to more significant investment.”

The bottom line

Optionality is a great trait to have as a company. It means that the company can easily build new revenue streams, create a more diverse business, and become a more resilient company. Thinking about the options that a company has gives me a better idea of how a company can transform in the future and what possibilities lie ahead.


Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have a vested interest in the shares of Amazon.com Inc, Netflix, Upstart, Square and Coupang. Holdings are subject to change at any time.

2 thoughts on “The Power of Optionality And The Companies That Wield It”

  1. Thanks for the post, Jeremy. Been investing for a while now and Upstart is seemingly one of the more exciting and promising companies in recent years. AI lending is relatively new and their algorithm seems to be ahead of any known competition. CEO Dave also said in an interview with Tom Gardner that traditional banks even with their decades-long throngs of data will find it difficult to replicate the algorithm. Were there any companies in the past that have demonstrated such potential only to fall flat? If you were to take your framework for picking investable companies, would Upstart be categorized as a promising pick?

    1. Hi Dali, thanks for reading the blog. Oh yes, I read the interview that Dave had with Tom Gardner too. That was really eye-opening and laid to rest some of my major concerns about the company’s business model. In terms of using our six-point investment framework, I believe Upstart does fit the bill as a promising investment.

      On your question on whether there were any companies that did not fulfil their potential, I believe there are many such examples. Yahoo comes to mind. The company controlled large chunks of internet traffic which could have translated to other possibilities beyond search and had the opportunity to crush the competition by buying Google. Unfortunately, poor management decisions ultimately resulted in them losing their “search” market to Google and wasted their early lead.

      So I guess it just goes to show that even with plenty of opportunities, businesses still need good execution and planning. So management will play a key role in their success.

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