How a Moat Stock Gets Its Economic Moat
February 22, 2022
Read Time 1 MIN
Moat investing is based on a simple concept: invest in companies with sustainable competitive advantages trading at attractive valuations. One of the first steps in implementing this approach is finding companies with a moat.
A company’s moat refers to its ability to maintain the competitive advantages that are expected to help it fend off competition and maintain profitability into the future. Morningstar has identified five sources of moat:
| Sources of Moat | Description |
| Switching Costs | Switching costs give a company pricing power by locking customers into its unique ecosystem. Beyond the expense of moving, they can also be measured by the effort, time, and psychological toll of switching to a competitor. |
| Intangible Assets | Though not always easy to quantify, intangible assets may include brand recognition, patents, and regulatory licenses. They may prevent competitors from duplicating products or allow a company to charge premium pricing. |
| Network Effect | A network effect is present when the value of a product or service grows as its user base expands. Each additional customer increases the product’s or service’s value exponentially. |
| Cost Advantage | Companies that are able to produce products or services at lower costs than competitors are often able to sell at the same price as competition and gather excess profit, or have the option to undercut competition. |
| Efficient Scale | In a market limited in size, potential new competitors have little incentive to enter because doing so would lower the industry’s returns below the cost of capital. |
Explore how each of these attributes may contribute to a company’s moat and learn more about companies that showcase these sources of moat in our Five Sources of Moat series:
- Switching Costs Build Moats and Retain Customers
- Intangible Assets: The Leading Source of Moats
- Network Effect: A Proven Way to Create a Moat
- Cost Leadership Provides Market Control
- Efficient Scale: Moats with Natural Monopoly
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Please note that VanEck may offer investments products that invest in the asset class(es) discussed herein.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
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DISCLOSURE
Please note that VanEck may offer investments products that invest in the asset class(es) discussed herein.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.