What is a moat? The Motley Fool Australia

It is also a highly profitable business as the costs are limited. Qualcomm’s licensing division reported over $5 billion in revenue in 2020. In the same way, a moat can only justify a higher price tag only up to a point.

For example, a defense firm that understands the inner workings of the Pentagon might propose a new system that’s perfectly in line with the new strategy. What a company is worth on the open market is an important metric. When researching companies, the financial statement is a great place to start. By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service.

Shopify, a rising star in e-commerce, has a powerful brand and innovative platform. However, its high valuation requires careful consideration. Investors must weigh the strength of Shopify’s moat against the price they are willing to pay.

Cost leadership is a business’ ability to produce a product or service that will be at a lower cost than other competitors. If the business is able to produce the same quality product but sell it for less, this gives them an economic moat over other businesses. Powell (2001, p. 132)8 views business strategy as the tool that manipulates resources and creates economic moats. Hence, viable business strategy may not be adequate unless it possesses control over unique resources that have the ability to create such a relatively unique advantage. This is when a company has lower costs than its competitors, allowing it to offer products at a lower price while still making a profit. To identify companies with a cost moat, look for those with a strong supply chain, efficient production processes, and economies of scale.

Brand value

This gives businesses a lower manufacturing cost over those of other competitors.9 The company can add value to the customer via transfer of the cost benefit to them. In medieval Europe they became famous around castles and fortifications. These wide, water-filled ditches were dug around the structures to protect them from attacks. Shopify got WAY ahead of its price during the pandemic compared to its financials. While a strong company paying too big of a price matters, investors during this time lost 80%, and the company still hasn’t recovered to those heights four years later.

• In a landscape where change is constant, a stagnant company can witness the erosion of its moat.
• Apple’s moat comes from its brand, the high switching costs for consumers, and its ecosystem.
• These not only provide Nvidia with its technical lead but also lock in customers who are heavily dependent on its specialized software and hardware.
• Once you get your website and other services running on AWS servers, it simply isn’t worth switching.

Fascinating Facts About Moats: From Medieval to Modern

• This powerful moat has enabled them in achieving a 40% market share in baseband processors.
• Or maybe a company has gathered the best minds and the best sales team in their industry, and replicating these advantages would be very costly and slow.
• Our managers are the businesses we run I’ve got one message to them you know which is the widening moat.
• This article contains general educational content only and does not take into account your personal financial situation.
• Moats are a very powerful tool that can help a company to grow and stay highly profitable.

Apple has a few economic moats, the primary one being creating products that didn’t exist before, such as the iPod, the iPhone, and the iPad. After creating these products, Apple’s economic moat has consisted of its marketing, its design, and its user-friendly interface. Nvidia benefits from network effects in industries that rely on GPU technology, such as gaming and AI research. Developers optimize their software for Nvidia’s hardware, making it difficult for users to switch to other platforms without facing performance trade-offs. This strong ecosystem of hardware and software compatibility deepens the moat by fostering loyalty and reducing the incentives for customers to switch to rival products.

Differentiated technology

Once you get your website and other services running on AWS servers, it simply isn’t worth switching. Besides, AWS provides you with everything you need; machine learning, analytics, AR/VR, robotics. And the more services you use, the more difficult it is to transition to a different cloud provider. A company, product, or service has a network effect when an increase in the number of users increases the value of its services. The value increases proportionally with the number of users.

Network Effect

Stay the course, don’t swing at every pitch, and keep putting in the reps, and you will find investing success. This holistic approach provides insights into the moat’s relative strength. In a landscape where change is constant, a stagnant company can witness the erosion of its moat. Beyond Search, the company also owns YouTube, the second-largest global search engine and the leading video content platform. This combination strengthens its moat by ensuring it has the resources to what is a moat innovate and adapt. With so many options in the market, choosing an ETF can sometimes feel like an overwhelming experience.

TradingView Review: Is It the Best Stock Charting Tool ?

Now that we’ve laid the groundwork, it’s time for a financial health check. The numbers will tell us a story; our job is to interpret the story. The payment industry is heavily regulated, and Visa has a strong relationship with regulators globally. This gives Visa an advantage over new competitors, as it has the experience and resources to follow regulations. For starters, Apple always had a strong and unique value proposition; creating personal experiences with the help of technology. They weren’t just making smartphones and computers, they were creating iPhones and Macs.

BHE is one of the leaders in renewable energy, with assets in both solar and wind. He also bought one of the largest natural gas lines to help bridge the gap between fossil fuels and renewable energy. The conglomerate’s enduring success stems from Buffett’s leadership and ability to identify companies with enduring moats.

Many cyclical businesses like commodities (mining, oil & gas) have no significant moats but can turn highly profitable with the right timing. An ultra-cheap deep value stock may not need a moat to bring a profit. A hyper-growth stock might not have the best moat but may be at the right place at the right time.

as a matter of fact any of the investment books published by Freeman Publications”

Nvidia consistently posts impressive gross margins, regularly exceeding 60%, a sign of its ability to charge premium prices for its products. Its high ROIC, supported by scale and strong market demand, indicates that Nvidia’s competitive advantages could be sustainable over the long term. A strong “position in the consumer’s mind” can command premium pricing and customer loyalty. Consumers often choose branded products over generic alternatives, even at a premium price. This brand loyalty acts as a moat, making it difficult for new entrants to gain a foothold in the market. Having an economic moat is important for a business if it hopes to retain its market share and profit margins.

Don’t worry, though – you’re not locked in, and can cancel your auto-renewal at any time before each ‘anniversary’ date without question or penalty. Since its inception in 2015, the ETF has returned 15.24%, including distributions. David George and Alex Immerman, partners at venture capital firm, a16z, when talking about gross margin, they pointe out how those alone are misleading. Warren Buffet kept highlighting, how Coca-Cola (one of his favorite brands and portfolio companies, had just that.