I Don't Think Moats Matter That Much...

This might be an unpopular opinion, but for the size of company we are investing in here (usually less than $10B) and because of the flexibility we have by only owning 10-20 companies, I don’t think moats really matter.

In fact, I think for companies at this stage…moats could actually be bad.

Yes, I said it…moats aren’t just not important. They are bad.

Hear me out…

We want our companies to be laser-focused on growing revenue, providing an awesome customer experience, treating employees well, high-gross margins, innovating, attracting customers, retaining customers, and getting customers to spend more.

Where in any of that is there any time to build a moat out? Not this early. MAYBE we could argue a moat could be Developer mindshare… or the accumulation of millions of data sets that our companies can draw insights from. But those aren’t the moats people generally talk about in moat discussions.

I think “moats” are exactly what our fast growing companies attack. They attack moats of other companies. Think about it.

If our companies were to establish moats right now, they would lose focus on what really matters. Growing revenue, gaining market share, pleasing customers, etc. And they’d probably start to get complacent and not want to disrupt their own moat that they sunk so much time and cost into building.

Additionally, no one is making us hold these stocks for 10 years. Obviously, we want to. But we don’t have to. If we start to see revenue growth slow, or customers leave, we can part ways and find a better place for our money.

So for us and our small, innovative concentrated group of companies… MOATS DON’T MATTER!!

Who’s with me? Who thinks I’m insane and it’s past my bedtime? I want to hear it.

All the talk of lack of moat with Zoom drove me to this post. That is just insane. Zoom has some of the best numbers I have ever seen…ever.

Also, the forecasting/concern of TTD’s growth in 8 years also played a part. What TTD does in 8 years literally does not matter. Not right now. What matters is that they have convinced investors they are one of the best companies around. Their products and improving revenue growth (I bet it improves more this year… maybe to 60%) are backing that up.

If they stop innovating and the numbers start to turn the other way, we can change our minds. We aren’t locked in for 8 years so we don’t have to make that decision right now.

I’d love to see CAGR estimates for Netflix, Apple, Amazon, Priceline, Google, the list goes on from 10 years ago. I bet 90%+ of those estimates were WAY LOW because almost all of the products those companies have that exist today did not exist back then. They released hundreds of new products (cough AWS, iPhone, Google Cloud Platform, etc) that literally created new markets and drastically expanded their TAM. Anyone who missed those companies 10 years ago because of someone underestimating their CAGR potential is probably kicking themselves.

Of course our stocks are “expensive” we’re probably going to lose 30%-40% sometime… maybe that’s already started (don’t argue this point it’s OT!!!). But guess what, that happened to my portfolio in Q4 2018. Down 35%. At that point I was still up more than 40% on the year.

As we all know, we recovered. Many of you went through the exact same thing and held… we all saw how the year ended and this year started. That’s why we hold the best damn companies we can find until THEIR numbers change.

Anyways, we’re probably going to see the bears start to come out and tell us how crazy and stupid we are. Get ready.

I know what I’m going to do. Hold the best damn stocks I can find until their numbers tell me to sell them

Not meant to spark a market timing discussion

Would love to hear your thoughts on if moats matter for our companies.

  • Austin

Shopify (SHOP) Ticker Guide

For information on all of my current holdings view my profile here: http://my.fool.com/profile/CMFAleeb/info.aspx

32 Likes

I think that the old economic moat model is being “breeched” by many of our favorite technology companies. This article actually addresses some of the types of ways that SaaS companies can have moats –

https://news.greylock.com/the-new-moats-53f61aeac2d9

…SaaS and cloud services can have strong economies of scales: you can scale your revenue and customer base while keeping the core engineering of your product relatively flat…

Land and expand anyone…

…For example, incumbent technologies like Oracle’s proprietary database are being attacked from open source alternatives like Hadoop and MongoDB…

Our companies don’t have a secret recipe that keeps out intruders. They also can’t just sit back and let the sales team do all the work (although we also have learned that the sales team is also integral to the success of our companies). Continued innovation by the R&D team is important.

Vicki
Fool One Guide

9 Likes

I think it depends on how you define the term “moat”.

If you have a narrow definition of what moat means, for example in the classical sense to be the lowest cost provider or to have pricing power (through a brand or unique selling proposition), then I would agree that these things don’t matter so much for many of our companies or, maybe better, are not as visible yet. I think they always matter.

At the core, a companies’ moat is about fending off competition and preserving margins. Many of our companies basically created their own little niche markets where they are not seeing a lot of direct competition. Of course, there is competition. There are many solutions out there that try to solve the same problems. The difference is that our companies have found new (better) ways to solve these issues. And there aren’t many companies that are able to do the same. Yet. The question is not if direct competition will arrive but when. And then, how these new entrants will affect the (our) current market leaders. Then the concept of moat will be important again. That’s the way competitive markets work, the wheel keeps on spinning.

I think the concept of a moat, which for me is to have a durable competitive advantage, is timeless. Maybe the criteria or terms of what makes a moat have changed. A network effect is much more important than having a good relationship with government to stay on top of regulation. It’s more important to have developer mindshare than having your sandpits close to your local markets. Having a team of smart developers is more important than patent protection. But the concept stays the same: Find something that makes and keeps you special in the market place, even when competitors try to copy you.

Niki

38 Likes

I think the concept of a moat, which for me is to have a durable competitive advantage, is timeless.

Niki, excellent rebuttal!

Denny Schlesinger

6 Likes

Define moat how you will, but there is little “stickiness” here as these services are weakly differentiated and easily switchable … a lot like buying toothpaste … choice is flavor driven, and when all brands offer comparable flavors, we switch based solely on price.

Happy, Happy, Happy has been done before.
https://www.goodreads.com/book/show/17455541-happy-happy-hap…

🆁🅶🅱
wordlessly watching, he waits by the window and wonders…

Define moat how you will, but there is little “stickiness” here as these services are weakly differentiated and easily switchable…

At which point we might as well concede that Amazon is the winner. They are after all able to be the lowest cost provider.

Competition also drives down cost which is good for us as consumers but, not so much as businesses. But, tech has always been a product where the features go up and the prices go down over time.

But, for the best companies, the ones we want to own, competition drives innovation. It is innovation that will allow MongoDB or Elastic Search to survive, flourish and benefit us as investors in a world dominated by Amazon, Facebook and other behemoths. The numbers will tell us if our companies are able to grow and become profitable, while beating out the competition. Stickiness and customer service will keep customers happy.

While every tech project isn’t 2 years + $2M anymore, it isn’t going to be that easy to swap out a Zscaler security environment or a MongoDB nosql implementation. Our companies will have pricing power if they are successful.

Vicki
Fool One Guide
long AMZN, MDB, ESTC, FB & ZS

11 Likes

Define moat how you will, but there is little “stickiness” here as these services are weakly differentiated and easily switchable

Then we are in BIG trouble because SaaS depends on stickiness to recover the cost of customer acquisition. To become familiar with the SaaS business model, watch this video:

David Skok of Matrix Partners: Driving SaaS Success Using Key Metrics

https://www.youtube.com/watch?v=bCBccKfG9U0

Our SaaS companies better have moats or we are in BIG trouble.

Denny Schlesinger

6 Likes

“Define moat how you will, but there is little “stickiness” here as these services are weakly differentiated and easily switchable…”

I think that’s the essence of what I’m trying to understand about Zoom. The numbers look tremendous from a growth perspective no doubt, I want to understand how sustainable that growth is. I’m invested in many of the board stocks like MongoDB, Twilio, Elastic because whether we want to call it a moat, innovator, rule breaker, or in Saul vernacular “category crusher” that’s where I want to be. If the story changes I may sell any one of them, but I can also envision holding for a decade.

Zoom might in fact be one, I just don’t yet have a clear understanding. Just based on my own usage of these types of services they all seem fairly interchangeable, work well and are easy to switch if you don’t like the pricing. But clearly they are doing something very right that is driving growth, so I don’t dismiss them in the least as a potential investment. More due-diligence required.

I think that’s the essence of what I’m trying to understand about Zoom

And Zoom is precisely what I had in mind when I posted. Unfortunately my lack of context confused some who inferred I was commenting on SaaS in general.

🆁🅶🅱
wordlessly watching, he waits by the window and wonders…

I think everyone agrees that patent protection is one of the best moats for many businesses. That applies usually to developers of innovative hardware. Software protection is a whole 'nother category.

People always try to copy the most successful enterprises. How do you keep them from succeeding at your expense. Low cost. High efficiency. Amazon certainly has competition.

Amazon is very into market share. If your site is the first one people visit, you are way ahead of competitors. But you must also have competitive pricing and good service. An attractive product assortment, etc, etc.

Maybe it depends on what kind of company you work for. I worked at a Fortune 50 company with well over 100,000 employees. The concept of “easily switchable” or more often what we refer to as “stickiness” is no small matter in a large organization. Even changing a report format is a big deal in a large organization.

Once you have several hundred direct users of a product and several hundred more who are not users but are directly influenced or in some way must respond to others who use the product, switching is inevitably a high impact exercise.

If the product does not have those impacts, it was not in broad use to begin with.

Transition costs are not just the contracted cost of the product. There’s training costs, learning curve costs, internal support costs just to name a few costs beyond the product cost. Once a product becomes embedded in a large organization, the product cost is often dwarfed by other internal costs when it comes to adopting a competitive product.

Some products, like Zoom, are more on the periphery of most company’s mission. OTOH, products like MDB, OKTA, AYX and others quickly become mission critical. The difference is that Zoom will help a company operate more efficiently due to the apparent facts that its better and cheaper than most (if not all) alternatives. But switching to a different video conferencing tool does not impede the company’s mission. MDB, OKTA, AYX and others are mission critical. In sudden absence of these products, a company that has become dependent on them would be dead in the water.

6 Likes