V03: Revenue diversification — how to analyse it

A customer accounting for 60% of revenue = catastrophic risk. If that customer leaves, the company dies. Diversification = robustness. Companies with a broad customer base survive crises better.

This is V03 — Revenue diversification in the AKM1 model: one of the 20 variables that together determine whether a company is an institutional quality stock or a collection of stories. In this article you get the variable explained, how to compute it yourself, and how three of history's greatest investors would have interpreted it.

Why the variable exists

Concentration as a risk factor has been analysed since the early stock market. In the Dutch tulip mania (1637) investors concentrated in tulip contracts lost everything. During the Great Depression (1929-1933) many companies concentrated in one industry crashed. Benjamin Graham (Security Analysis, 1934) was the first to systematically examine concentration as an investment criterion — he advocated diversification for risk reduction. In the 1950s Harry Markowitz formalised Modern Portfolio Theory, which quantified how diversification reduces portfolio risk.

Why concentration is risk

Concentration — the silent risk factor Revenue diversification is about how broad the company's revenue base is — how many customers, products, markets, and geographies contribute to revenue. A customer accounting for 60% of revenue is not a customer — it is an employer. If that customer leaves (bankruptcy, switches supplier, internalisation) the company dies overnight. This is concentration risk — the silent, often ignored, but potentially catastrophic risk factor. AKM1 gives score 1 (lowest) to companies with one customer >50% of revenue; score 5 (highest) to companies with no customer >5%. The difference in risk between these is astronomical. A company with 50%+ customer concentration can give a 30% return one year and -80% the next. A company with a broad customer base can give a stable 12% annually over decades. ⚠️ WARNING A company with one customer at 50%+ of revenue is not an investment case — it is a lottery. Avoid unless you have insider information about the customer contract.

Computing revenue diversification

Main customer share — the simplest metric Main customer share = largest customer's revenue / total revenue × 100. This is the simplest metric and the one AKM1 uses as the primary scoring basis. Example: a company with total revenue 500 MSEK and largest customer 50 MSEK → main customer share = 10%. This gives score 4 (largest customer <10% is score 4, <5% is score 5). If the largest customer is 80 MSEK → main customer share = 16% → score 3 (largest customer 10-20%). The main customer share is easy to find in the notes to the accounts (IFRS requires reporting at ≥10%) and is a good first screening. But it is insufficient — a company can have a largest customer at 8% (score 4 according to AKM1) but a top 5 customers at 70% (high concentration). Always use complementary metrics. 📖 DEFINITION Main customer share = (largest customer's revenue / total revenue) × 100. AKM1: p1 = >50%, p2 = 30-50%, p3 = 20-30%, p4 = <10%, p5 = <5%.

Why concentration is risk

Concentration — the silent risk factor Revenue diversification is about how broad the company's revenue base is — how many customers, products, markets, and geographies contribute to revenue. A customer accounting for 60% of revenue is not a customer — it is an employer. If that customer leaves (bankruptcy, switches supplier, internalisation) the company dies overnight. This is concentration risk — the silent, often ignored, but potentially catastrophic risk factor. AKM1 gives score 1 (lowest) to companies with one customer >50% of revenue; score 5 (highest) to companies with no customer >5%. The difference in risk between these is astronomical. A company with 50%+ customer concentration can give a 30% return one year and -80% the next. A company with a broad customer base can give a stable 12% annually over decades.

Three perspectives on revenue diversification

Peter Lynch: Lynch warned against 'di-worsification' — companies that grow by buying up unfamiliar businesses. 'A company that buys a film company when they really make steel destroys value.' He preferred 'pure plays' — companies with a clear business idea. Lynch's rule: 'If you cannot describe the company's business in one sentence, it is too diversified.'

Benjamin Graham: Graham saw diversification as a protection, not a strategy. He argued that conglomerates often hide weak businesses behind strong ones. 'A diversified portfolio of mediocre companies is worse than a concentrated one of strong ones.' Graham preferred companies with a clear core business.

AK1's interpretation: AKM1 weight 7%. Revenue diversification is assessed on three axes: (1) customer concentration — no customer >20% of revenue, (2) product diversification — not dependent on one product, (3) geographic spread. We warn of 'false diversification' — companies that appear diversified but are in fact exposed to the same underlying cycle.

Go deeper

When high concentration is strength, not weakness

Want to practise with worked examples, chapter by chapter? The course Revenue diversification (V03) contains 6 chapters, Lynch and Graham perspectives and how AK1 uses the variable in the wave matrix. See also the complete guide to Swedish stock analysis for how all 20 variables fit together.

FAQ

What is revenue diversification?

Revenue diversification describes how broad a company's revenue base is — how many customers, products, markets and geographies contribute to sales. A broad revenue base makes the company less sensitive to individual customers leaving or a single market failing, and is therefore a measure of robustness.

How do you calculate the largest customer share?

Huvudkundsandel = största kundens intäkt / total omsättning × 100. I noterade bolag hittar du uppgiften i noterna, eftersom IFRS kräver att kunder över 10 % av omsättningen redovisas. Komplettera gärna med andelen för de fem största kunderna — ett bolag kan ha låg huvudkundsandel men ändå hög koncentration bland sina största kunder.

Why is customer concentration a risk?

Om en kund står för en stor del av omsättningen blir bolagets framtid beroende av en enda relation — kunden kan gå i konkurs, byta leverantör eller börja producera internt. Därför ger AKM1-modellen lägst poäng när kundkoncentrationen överstiger 50 % och högst när ingen kund passerar 5 %.

Is diversification always best?

Not necessarily. Peter Lynch coined the term 'di-worsification' — companies acquiring businesses they do not master just to broaden. There is also 'false diversification': companies that look broad but whose revenues all move with the same business cycle. The educational point is that diversification should be measured by underlying risk, not just by the number of business areas.

This is educational financial analysis, not investment advice.