Customer concentration means a small number of customers provide a big portion of a company's revenue. That detail often appears in a single sentence inside a 10-K or an earnings presentation, but it can explain why a fast-growing company suddenly collapses when one customer leaves. What should you look for, and how do you measure how much is at stake?
In this article you'll learn where to find top-customer disclosures, how to calculate a simple "revenue at risk" number, and how to interpret what you find. You'll see practical examples with tickers and step-by-step checks you can use when you research a stock so you can spot hidden risks before they become losses.
- Customer concentration shows how much revenue depends on a few customers; more than 10% from one customer is often material.
- Find disclosures in the 10-K, MD&A, risk factors, notes to the financial statements, and investor presentations.
- Revenue at risk = percentage of revenue from top customer(s); compare that to the company’s expected growth to see downside risk.
- Example: a company growing 20% can still see a net revenue decline if it loses a customer that represents 30% of sales.
- Watch contract length, renewal rates, geographic and product diversity, and payment delays as mitigation signs.
Where to find top-customer disclosures
Public companies that face customer concentration usually mention it in a few predictable places in their SEC filings. The most useful places are the annual report on Form 10-K and the quarterly report on Form 10-Q. Look in the Management's Discussion and Analysis section for comments on customers and in the risk factors section for concentration risks.
Also check the notes to the financial statements. Some companies file a separate note titled "Concentration of Credit Risk" or "Major Customers" that lists customers accounting for more than a stated threshold. Investor presentations and earnings-call transcripts often repeat the same figures in a more readable format.
Search tips
Use the EDGAR search tool or your broker's document search. Search for terms such as "customers," "concentration," "top customer," "major customer," and "significant customers." If you can't find an explicit percentage, the company may still discuss large customers qualitatively in the risk factors or MD&A.
Why customer concentration matters to your investment
When a single customer represents a large share of revenue, the company is exposed to idiosyncratic risk. That is the risk that something specific to that customer reduces demand, delays payments, or ends the relationship. Even fast revenue growth can be overwhelmed by losing one major account.
Customer concentration can affect margins, cash flow, forecasting, and valuation. If a top customer provides premium pricing or favorable payment terms, losing them can reduce margins and increase working capital needs. You don't need a perfect read on every customer, but you do need to know if one client can swing the business.
Real-world context
Large tech companies sometimes have lower concentration because their revenue is spread over millions of users. By contrast, B2B companies like industrial suppliers, software vendors selling to enterprises, and defense contractors often have higher concentration. For example, a semiconductor supplier may rely on one or two big cloud providers for a large part of sales. Historically, companies such as $QCOM have had a meaningful portion of revenue tied to one large partner, which created negotiating leverage and volatility during disputes.
How to calculate revenue at risk, step by step
Revenue at risk is a simple measure you can calculate quickly once you find the disclosed percentages. It shows how much of a company's revenue could disappear if a major customer is lost. This gives you a quick sense of downside risk compared with expected growth or valuation.
- Find disclosed percentages, for example the top customer accounts for X% of revenue and the top three customers account for Y%.
- Pick a scenario: loss of the largest customer, or loss of the largest three customers.
- Calculate the dollar and percentage impact on revenue and compare to expected growth.
Simple formula
Revenue at risk from the top customer = (Percentage of revenue from top customer) × (Total revenue). For percentage impact on total revenue use the disclosed percentage directly. To include multiple customers add their percentages.
Example with numbers
Imagine a company, $ACME, reported $1 billion in revenue last year and disclosed the top customer accounted for 30% of sales and the top three customers together accounted for 55%.
- Top customer revenue at risk: 30% of $1 billion = $300 million.
- Top three customers revenue at risk: 55% of $1 billion = $550 million.
If management is forecasting 20% growth next year, that means expected revenue increase is $200 million. Losing the top customer would erase that entire growth and drop revenue by an additional $100 million, meaning revenue would fall to $900 million, a net decline of 10% from the prior year.
This shows why focusing only on growth rate can be misleading. A high growth rate looks great until you realize a single lost order can more than offset expected gains.
Putting revenue at risk into investor context
Once you calculate revenue at risk, use it to adjust how you think about the company's valuation and downside. Ask whether management has disclosed long-term contracts or renewal schedules that reduce the chance of sudden losses. Also check who the customers are; a large, diversified multinational customer may be less risky than a small startup with volatile demand.
Two useful comparisons are:
- Revenue at risk versus expected annual growth, to see whether losing a customer could wipe out growth.
- Revenue at risk versus cash and liquidity, to estimate how long the company could operate if revenue fell suddenly.
Example with a ticker you may know
Suppose a small enterprise software company, $SMALL, reported $200 million in revenue and disclosed its top customer contributes 25% of revenue. That is $50 million at risk. If analysts expect $SMALL to grow 30% next year, that implies $60 million of incremental revenue. Losing the top customer would erase most of expected growth, and may also reduce margins if the customer paid premium prices.
It is not uncommon to see valuations that assume future revenue growth without clearly accounting for customer concentration. When you see a concentration above 20% from a single customer, consider it material and assume additional downside risk in your analysis.
Signals that mitigate or worsen customer concentration risk
Customer concentration alone is not a death sentence. Look for factors that reduce the chance of losing customers or soften the impact if a relationship ends. Long-term contracts, high switching costs, exclusive supplier status, and a diversified product mix all help. Frequent renewals and high retention rates are strong positive signals.
On the other hand, short-term contracts, one-off project work, a concentration in a single industry that is cyclically weak, or large receivables tied to one customer are negative signs. Also watch customer payment delays. A company with heavy concentration and a rising days sales outstanding number may be in trouble.
Checklist for your research
- Does management disclose the percentage of revenue from top customers?
- Are there long-term contracts or only short-term orders?
- What is the geographic and product mix of that customer revenue?
- Are receivables concentrated or delayed for those customers?
Common mistakes to avoid
- Ignoring disclosures that are easy to find, such as the 10-K or investor slides, and assuming revenue is diversified.
- Mistaking "accounts receivable concentration" for sales concentration, or vice versa. The two are related but different.
- Assuming a high growth rate removes risk. Growth can be wiped out by losing a major customer.
- Overlooking the quality of the customer. A single large, financially stable customer is less risky than several small startups accounting for the same share.
- Failing to check contract terms. A disclosed percentage without contract details leaves you guessing about the timing of risk.
FAQ
Q: How common is customer concentration among public companies?
A: Many public companies, especially in B2B industries, report some level of customer concentration. A top-customer representing more than 10% of revenue is fairly common and usually disclosed as material. The pattern is more common among small and mid-cap companies than the largest tech giants.
Q: If a company doesn't disclose customer percentages, does that mean there is no concentration?
A: Not necessarily. Companies are required to disclose concentration only when it is material. If you don't find explicit numbers, read the risk factors and MD&A carefully, and look for indirect signs such as high revenue volatility or large receivable balances linked to a single customer.
Q: Can analyst estimates help me assess customer risk?
A: Yes, analyst notes and industry research can help you identify major customers and contract structure. However, analysts may not have full visibility into private contracts. Always corroborate analyst commentary with company filings and investor materials.
Q: How should I factor customer concentration into my valuation assumptions?
A: Treat customer concentration as an added risk premium. You might lower your growth assumptions or increase your discount rate to reflect the chance of losing a major client. Also consider stress scenarios that model a partial or complete loss of top customers and the time needed to replace that revenue.
Bottom line
Customer concentration is a small disclosure with big implications. By checking the 10-K, MD&A, notes, and investor slides you can find the percentage of revenue tied to top customers and calculate revenue at risk quickly. That number often tells you more about downside risk than headline growth rates do.
Do this simple check when you research a new stock. Compare revenue at risk to forecast growth, review contract terms, and look for signs of diversification or dependency. At the end of the day, understanding who pays the bills will help you avoid surprises and make better-informed decisions.
