Marketing Communication

Intangible Assets: The Leading Source of Moats

02 May 2019

The term “economic moat” describes a company’s ability to maintain its competitive advantages and defend its long-term profitability. This moat investing education series explores the five primary sources of moat, according to Morningstar: 1) Switching Costs; 2) Intangible Assets; 3) Network Effect; 4) Cost Advantage; 5) Efficient Scale. Here we explore the concept of:

Intangible Assets: Patents, brands, regulatory licenses, and other intangible assets can prevent competitors from duplicating a company's products, or can allow the company to charge a significant price premium.

Intangible Assets Help Build Strong, Identifiable Advantages

Patents are a legal barrier to entry that protect companies from unauthorized commercial usage of their products by competitors. Similarly, government licenses may raise the entry hurdles for new competitors. Additionally, brands equity can increase a customer’s willingness to pay for a product or service. These are examples of what Morningstar refers to as “intangible assets.”

Although not always easy to quantify, intangible assets are one of the primary sources of strong competitive advantages for businesses and a key economic moat source. Intangible assets can include corporate intellectual property, such as patents, trademarks, copyrights, government licenses, and business methodologies that help companies generate economic profits.

Intangible Assets in Action

Starbucks Corp. is the leading specialty coffee retailer in the U.S. According to Morningstar, Starbucks’ wide economic moat comes from its “brand intangible asset that commands premium pricing combined with meaningful scale advantages.” Morningstar also believes that “few national/regional restaurant or specialty coffee operators are willing or able to compete with Starbucks’ in-store customer experience.”

Eli Lilly and Co. is a pharmaceutical company that focuses on neuroscience, endocrinology, oncology, and immunology. Patents are critical in preventing competitors from duplicating its drugs. According to Morningstar, “patents, economies of scale, and a powerful distribution network support Eli Lilly’s wide moat. Lilly’s patent-protected drugs carry strong pricing power, which enables the firm to generate returns on invested capital in excess of its cost of capital.”

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This is a marketing communication for professional investors only. Please refer to the UCITS prospectus and to the Key Investor Information Document (KIID) before making any final investment decisions. This information originates from VanEck Securities UK Limited (FRN: 1002854), an Appointed Representative of Sturgeon Ventures LLP (FRN: 452811) which is authorised and regulated by the Financial Conduct Authority in the UK. The information is intended only to provide general and preliminary information to FCA regulated firms such as Independent Financial Advisors (IFAs) and Wealth Managers. Retail clients should not rely on any of the information provided and should seek assistance from an IFA for all investment guidance and advice. VanEck Securities UK Limited and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.

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