Have you ever heard of a “competitive moat”? Let’s dive in. (Pun intended.)
We’ve all seen moats depicted in movies and storybooks our whole lives — the water-filled trenches surrounded medieval castles and kept out predators and invaders. Those inside the moat could go about their business safely, and a castle that had a “competitive” moat — one with a big, strong, or particularly wide trench, well, that was indeed prosperous.
Competitive Moats Explained
It’s pretty much the same thing in business terms: Companies with competitive moats are those that have “either a size advantage, a resource advantage, or a talent advantage, but it’s something that really gives you a giant leg up against the competition,” explains Karen Finerman, founder and CEO of Metropolitan Capital Advisors and co-founder of HerMoney’s InvestingFixx investing club for women.
Morningstar and Warren Buffett call this phenomenon an “economic moat,” and include intangible assets and efficient scale as key criteria that help shore up the castle company.
For example, Google had a competitive moat around search until quite recently, notes Finerman. But now OpenAI and Microsoft are aggressively edging into the space.Can Google’s moat hold off the competition? TBD.
And there’s a similar phenomenon happening with streaming: “For a long time, Netflix had [a moat]. Nobody was really making any inroads, or even really trying to get into the streaming business,” Finerman explains. But now with Paramount+, Max (formerly HBO), Peacock and others, that’s changed. Likewise, Disney once had a theme park moat, but now faces competition from Six Flags and Universal — and is going after Netflix’s streaming moat with Disney+. But, we have to acknowledge, moats don’t last forever. Eventually competitors figure out how to storm the castle.
Here’s a look at other examples of companies with competitive moats.
Microsoft (MSFT)
Microsoft has long been the leader in desktop publishing, software, and cloud storage, and is a potential leader in Artificial Intelligence as that race ramps up. Microsoft certainly has competitors in each of the various sectors of its business, but overall is in a comfortable position in its field. In tech, however, today’s protective moat can quickly become tomorrow’s ugly ditch, so this moat bears guarding.
Amazon (AMZN)
As the dominant player in home delivery and logistics, Amazon now has the place in our national lexicon once occupied by McDonald’s in the 1980s. (What’s more American these days — a Big Mac or Amazon Prime?) Today, Amazon sells nearly everything, and what it doesn’t have in stock, it connects customers with sellers who do. Additionally, its 18-wheeler trucks and black delivery vans serve as constant moving billboards for the brand. Yes, other brands are trying to make inroads into Amazon’s dominance, and virtually everyone now sells online, but Amazon remains the top dog. What could diminish its moat is raising prices and reducing services for consumers in order to pay higher, more competitive wages to its employees.
JPMorgan Chase (JPM)
While the U.S. has a “Fab Four” of mega-banks (Chase, Bank of America, Citi, and Wells Fargo), JPM Chase is the most mega. Its $3.2 trillion in assets is only a little less than Citi and Wells Fargo combined. In many ways, Chase defines the term economies of scale. As such, the bank has the most money to invest, to take chances, and to make mistakes. But Chase doesn’t make many mistakes (except for maybe Charlie Javice.) As long as CEO Jamie Dimon doesn’t retire, Chase seems poised to continue its dominance.
Apple (APPL)
Be it the iPhone, AirPods, MacBook, Apple Watch or Apple TV, Apple is essentially the Marvel “Avengers” equivalent of hardware and software. They can’t be beaten. Each product is sleek and cool and has its own superpower (aka top-notch functionality), and while each device could be a star on its own, the way all the products function together seamlessly makes them tough to beat. And with $55 billion in cash on hand, the company has purchasing power and the ability to hedge against currency fluctuations.
VanEck Morningstar Wide Moat ETF (MOAT)
If you like the concept of wide-moat companies but aren’t sure which one to pick, the “Wide Moat” ETF (yes, that’s the actual name) has 49 holdings, including a few of those mentioned above. The fund’s largest holding is META, at just under 4%, but it’s diversified across many industries. This ETF is a good way to invest in a wide range of blue chip stocks that have excellent market share in their areas. The MOAT ETF has been selling at around $75 and is up over 14% year-to-date.
READ MORE ON HERMONEY:
- 7 Steps You Need To Get Started Investing Today
- Does “Buy What You Know” Still Work For Investing?
- Are More Mergers In The Banking Industry Coming?
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