What’s a company’s moat and why is it important when assessing your potential investment?

This is a concept you will encounter when you are researching companies and what shares you should invest in.

A company’s moat is the competitive advantage it enjoys over competitors. It indicates how robust that company will be in maintaining long term advantage over competitors. This advantage may be a protection of market share, profits, a barrier to entry, or any number of unique features to protect the company.

A company like Coca Cola has a massive company moat. There is only one Coca Cola. Yes, there are competing cola drinks. But Coca Cola, the product, and its brand, has an incredibly strong moat.

The same might be said of Apple, even though there are competing companies in mobile phones and computers.

But a company like Snap Inc. does not enjoy a strong moat. It is open to the tough competitive actions of a company like Meta with its Instagram platform, and TikTok.

It can also be chipped away by various messaging apps such as WhatsApp and Telegram. Snap Inc may well be a sound share to invest in, and it may maintain a unique and loyal following in its market. But a strong moat is not an advantage it currently enjoys.

That’s not to say it may not create one in the future. That is quite possible, and Snap Inc. describes itself as a camera company. So, it may well introduce a unique new product that is difficult to copy such as artificial intelligence head or eye wear.

A moat can arise in a number of different ways such as:

  • A cost moat
  • A product moat
  • A cultural moat
  • A resource moat
  • A combination of these

Think about companies like Starbucks, Disney, Coca Cola, McDonalds. These companies have moats which are an amalgam of culture, product, cost.

Next time you are researching a company and the value of its share, don’t overlook its moat.

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