What Is a Picks-and-Shovels Play? Meaning in Investing

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A picks-and-shovels play is an investment strategy that buys the companies supplying the tools, equipment, materials or services an industry needs, instead of the companies selling that industry’s end product. The investor is betting that the industry will keep spending on its inputs, whichever producer ends up winning the market.

Where the term comes from

During the Gold Rush of the 1840s and 1850s, prospectors arriving in California had no guarantee of finding gold, but they all had to buy picks, shovels, pans, food and clothing first. Merchants selling those goods earned revenue from every arrival, lucky or not. Samuel Brannan, a San Francisco store owner, is often cited as having grown rich selling mining supplies. Levi Strauss built a dry-goods business serving miners and later patented riveted work pants with Jacob Davis in 1873.

The history also carries a warning: Brannan died with little money decades later. Supplying a boom does not guarantee lasting profit.

How a picks-and-shovels play works

The mechanism is a change in what the investor is exposed to. A shareholder in an end-product company is betting on that company’s market share, pricing and execution. A shareholder in a supplier is betting mainly on the total volume of spending on its inputs.

A simple way to frame a supplier’s revenue:

Supplier revenue = (units the industry buys) × (supplier’s share of those purchases) × (price per unit)

No individual producer’s success appears in the formula.

Hypothetical worked example

This hypothetical example does not describe any real company.

Suppose a new industry has five producers, and each one needs a specialized machine that costs $1 million. One supplier sells the machine to all five.

• An investor who picks Producer A is betting that A beats the other four. If A fails, the investment may lose most of its value even if the industry grows.
• The machine supplier earns $5 million of sales from all five purchases. If Producer A fails but Producers B through E double their capacity, the supplier may sell more machines, not fewer.

Now change one assumption: the whole industry shrinks because consumers lose interest. All five producers cancel orders, and the supplier’s sales fall along with theirs. The supplier spread out its company-specific risk, but it still carries the industry risk.

Interpreting a picks-and-shovels play

The strength of the case depends on a few features of the supplier:

• Customer breadth. A supplier selling to many producers, and ideally to more than one industry, is less dependent on any one buyer. The original shovel maker also sold to construction crews and farmers, not just miners. A “supplier” with one dominant customer behaves more like a bet on that customer.
• How essential the input is. An input with few substitutes gives the supplier pricing power. A commodity input that any rival can provide gives less.
• Position in the value chain. Raw-material producers sit far from the final product but remain exposed to commodity prices. Toolmakers and infrastructure builders depend more on the capital spending cycles of their customers.

Why investors use the strategy

Picks-and-shovels investing lets an investor participate in a fast-growing or hard-to-call industry without predicting which brand will win. It suits industries that are new, crowded with competitors, or too risky or niche to back one company with confidence. Because a supplier’s sales come from many sources, its cash flows can be steadier than those of any single producer. The approach also works in older industries: buying oilfield equipment makers instead of oil producers, or factory-machinery manufacturers instead of the companies using the machines.

Real-world examples

Batteries instead of electric cars. Rather than choosing among automakers, an investor could own a battery supplier. Panasonic has long supplied batteries to Tesla, signed a 2021 deal for larger cylindrical cells, and in February 2020 announced a battery joint venture with Toyota. Its EV exposure comes from supplying more than one automaker.

GPUs instead of cryptocurrencies. Graphics processors from Nvidia and AMD were bought in bulk by cryptocurrency miners. Those chipmakers benefited from mining demand even while coin prices swung sharply, which is close to the original Gold Rush pattern.

Internet infrastructure instead of dot-com stocks. In the late 1990s, makers of routers, switches and fiber-optic cable supplied the companies building out the internet.

5G infrastructure. Makers of antennas, transmitters and other network equipment supply the build-out. Device makers and carriers sit closer to the end consumer.

Cannabis supplies. Producers of grow lights, hydroponic systems, irrigation equipment and fertilizer serve cannabis growers without selling cannabis themselves.

Artificial intelligence. The same reasoning is applied to AI, where chip designers, memory makers, data-center operators and power and cooling suppliers are described as picks and shovels for companies building AI models and applications.

How to find a picks-and-shovels business

1. Start with a growing industry. Identify a sector where spending is rising, even if the eventual winners are unclear.
2. Map the inputs. List the technologies, equipment, materials and services every producer in that industry needs.
3. Find who supplies them. Look for listed companies in those supporting businesses. A stock screener can narrow the field by industry, size and financial metrics.
4. Check how much revenue actually comes from the boom. A company described as a supplier may earn only a small share of its sales from the hot industry. Tracking year-over-year growth in the relevant segment shows whether the demand is showing up in results.
5. Judge the price. Compare valuation measures such as the P/E ratio with the supplier’s earnings per share growth.

Limitations of a picks-and-shovels play

The industry can still collapse. Suppliers depend on their customers’ spending. If the economy slows and oil prices fall, producers cut drilling, and equipment makers lose orders. After the dot-com bubble burst in 2000, telecom equipment suppliers such as Lucent and Nortel suffered severe declines because the infrastructure build-out stopped along with the startups it served.

Demand can vanish for structural reasons. GPU demand from Ethereum miners ended when the network switched from proof of work to proof of stake in September 2022. The tool was no longer needed for that kind of mining.

Better tools can work against the toolmaker. Technological progress can make “mining” so efficient that customers need fewer units, or it can push prices down as the input becomes standardized.

Popularity raises prices. Once a supplier is widely seen as the shovel seller of a boom, its shares can trade at valuations that leave little margin for error. A slowdown in growth can then hurt the stock badly even if the business stays profitable.

Cyclicality. Suppliers of capital equipment often see orders rise sharply when customers expand and fall sharply when they pause. Their earnings can be more volatile than the end market itself, so supplier stocks are not automatically defensive and can fall harder than end-product companies in a downturn.

Picks and shovels vs. related ideas

• Diversification. Buying several suppliers reduces company risk, but a portfolio of suppliers to one industry is still concentrated in that industry. Broad index exposure, such as the S&P 500, spreads risk across many industries.
• Commodity producers. A lithium miner supplies the battery industry, but its profits swing with lithium prices. It is a picks-and-shovels play with commodity risk attached, not a stable toll collector.

The Bottom Line

Investors who expect an industry to grow but cannot pick its winners can use suppliers to avoid betting on one brand. Suppliers still rise and fall with their customers' spending, can lose demand for structural reasons, and often trade at high valuations once a boom is popular. Check how much revenue truly comes from the boom and whether the price leaves room for error before buying.