What it is:
Obsolescence risk is the risk that a company's product or service will become obsolete or out of date.
How it works (Example):
For example, consider the fax machine. Once a symbol of modern communication, the fax machine was one of the first ways to share information almost instantaneously. Manufacturers of fax machines, fax paper, fax toner, and fax transmission services faced obsolescence risk with the advent of increased internet bandwidth, text messaging, PDF technology, and e-mail use. Eventually, the technology became obsolete as fax machine users migrated to cheaper, faster, more efficient methods.
Why it Matters:
Obsolescence can crush a company in a short amount of time by making it uncompetitive. Technology-reliant companies are especially vulnerable to this risk, which may or may not be reflected appropriately in a company's stock price. Thus, any analysis of a company's fundamentals should incorporate a careful review of what would happen if new technology suddenly made a particular product outmoded.