A company lands a massive client, and revenues are soaring. It looks like a huge success, but it could be hiding a "silent killer." Relying too heavily on a few large customers is one of the most overlooked dangers in investing. This episode is a deep dive into this critical topic, answering the question:

How do I evaluate customer concentration risk?

We provide a complete guide to spotting this hidden fragility before it's too late. Discover the five core dangers of customer concentration, from losing all your bargaining power to facing a total collapse if that one big client walks away. Learn where to find this data in a company's 10-K report and how to measure the risk with simple percentages. We'll also provide a 6-step framework for analyzing any company and show how this single factor can cut a company's valuation in half.

This isn't just a textbook term; it's a fundamental test of a business's resilience. Is your investment built on solid ground or quicksand? Subscribe to learn how to see past the big numbers.

Key Takeaways

• It's the "Silent Killer" of Businesses: Customer concentration is the massive financial risk a company faces when too much of its revenue depends on just one or a few large customers. If that "big fish" leaves, the entire business can collapse.
• It Destroys Bargaining Power and Valuation: When a single customer accounts for a huge portion of your sales, they call the shots. They can demand lower prices and better terms, effectively making you their "hostage." This fragility drastically reduces a company's valuation in a sale or IPO.
• Check the 10-K for Customers >10%: For public companies, the most direct way to find this information is in their annual report (the 10-K filing). Companies are typically required to disclose any single customer that accounts for 10% or more of their total revenue.
• A High-Risk Benchmark: While context matters, some general red flags include one customer making up over 20-30% of revenue, the top three customers over 70%, or the top five over 80%. A well-diversified company often has no single customer over 10%.
• Proactive Management is Key: Smart companies actively work to reduce this risk. As an investor, you should look for signs of customer base expansion, product diversification, and an effort to lock in key clients with long-term contracts.

"If one customer is, say, half your sales, they call all the shots. They can demand lower prices, longer payment terms... you lose your leverage, your margins shrink. You're basically their hostage."

Timestamped Summary

• (01:54) The 5 Core Dangers of Customer Concentration: A breakdown of the critical risks, including survival risk, loss of bargaining power, negative valuation impact, financing risk, and becoming a growth bottleneck.
• (03:59) How to Measure the Risk: Learn the simple methods for quantifying this risk, from basic revenue percentages to using the Herfindahl-Hirschman Index (HHI).
• (06:58) Real-World Case Studies: An examination of customer concentration in the supply chains of major companies like Apple/Foxconn and Boeing/US Government.
• (10:24) The 6-Step Analysis Framework: A practical, step-by-step checklist you can use to evaluate the customer concentration risk for any company you are analyzing.
• (13:16) The Dramatic Impact on Valuation: A powerful example showing how a company with $10 million in profit can be worth half as much ($30M vs. $60M) solely due to its high reliance on a single customer.

Can you think of a company that has significant customer concentration risk? Share it in the comments. If you found this deep dive into a hidden risk valuable, share

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