As always, you can read this on my blog, or read it on Reddit.
Step 3 of 10: What is their Competitive Advantage & Who are their Competitors?
Sometimes the company's competitive advantages are explained in the 10-K report, but sometimes we have to make common sense judgment on what their competitive advantages are and why that is. This is because if the company lose their competitive advantage, their price will go down in the long term.
Competitive advantages are very important because that is our moat around our castle. When competitors try to come invade our castle and if our moat is very weak, invaders can easily take over our castle and steal everything. We want a very deep and wide moat with lots of piranhas, explosives, and other protective gear because we don’t want our castle to be invaded.
If the company’s moat is very strong, they can keep making their high margins. We should be able to see if the company’s competitive advantage has been hurt when we see a hit on their margins.
Competitive advantages are different in every industry, so we have to do some digging within that industry to find out what the moat is in that specific industry. For a commodity such as oil, having the lowest price is their competitive advantage because it does not matter where you pump your gas from since gas is gas. Let's look at an example we might see every day. If we are at a Valero gas station and if there an Exxon across the street, and the Exxon is $0.20 cheaper than Valero, we are going to fuel up at the Exxon!
Let’s look at some of Apple's competitive advantages (NYSE: AAPL).
In my opinion, these are Apple’s competitive advantages:
Premium Brand
Apple has a premium brand so they can charge more than most phone makers. Also, there are a lot of passionate fanboys who are brand loyal and will wait hours outside when Apple releases a new phone! Do people do this for Android? For Samsung? Nope.
Switching Cost / Network Effect
It is very hard for Apple users to switch to an android device because they have all their information on an iPhone. It is actually getting easier for people to switch, however, it is still pretty hard for iPhone users to switch. As more and more Apple users come onto the system more and more people will develop games and apps on their Appstore.
Ease of Use - This is debatable, however, that is why this section is qualitative! Apple's interface seems more intuitive than an Android device.
Customer Service
I would say Apple has one of the best in-store and online customer service. When I go to an apple store, an Apple representative is always there and waiting to answer any questions that I might have. They are always checking up on me and even the consumer checkout process is easy! No waiting in-line!
Now let’s think about who competes with Apple. Google makes phones however 90%+ of Google's revenue comes from ads, Microsoft kind of makes phones but not really haha. There are other phone makers such as Xiaomi, LG, Samsung, etc.. Competition is fierce in this industry.
Remember what I said about margins? When margins shrink, it is a sign of decreasing pricing power which means that the company is losing some their competitive advantages. We won't be looking at numbers in depth in this section, but let's take a quick look at Apple's Operating Margins.
In 2008, Apple had an operating margin of 22% and in 2012, Apple had an operating margin of 35%. In 2014, Apple had an operating margin of 29% and in 2016, Apple had an operating margin of 27%.
Until 2012, other phone makers were playing catch up. In 2013 - 2014, Apple's competitors have caught up which decreased Apple's margins a bit.
TL; DR
- Figure out what the company’s competitive advantage is.
- Figure out how strong the company’s competitive advantage is.
- Find who the competitors are.
Submitted November 17, 2017 at 04:31PM by stock_market_noob http://ift.tt/2yRKRXV
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