Economic Moats Sustain Tech Leaders in Turbulent Times
08 May 2023
Read Time 2 MIN
In recent years, the technology sector has served as a prime example of the power of economic moats, propelling a select few companies to mega-cap status. However, the sector has recently faced challenges that have sent ripples through the industry. Morningstar analysts joined a recent VanEck webinar to discuss the importance of economic moats in this increasingly competitive and volatile landscape.
Moats Stay in Favor Despite Trouble in the Broader Tech Sector
Over the past decade, a handful of technology companies have evolved into mega-cap behemoths, dominating market returns and solidifying their position in the global economy. Central to their remarkable success has been the strategic implementation of strong economic moats, enabling these companies to maintain a competitive advantage over their rivals and capture unparalleled market share.
While the broader sector has recently struggled, Morningstar believes companies with the strongest moats are well-positioned to outperform. This phenomenon is not limited to the industry's behemoths alone. Several smaller technology firms with well-established competitive advantages are also utilizing economic moats to secure their position in the market. Below, we take a closer look at two technology portfolio holdings in the VanEck Morningstar Wide Moat ETF (MOAT®) and the VanEck Morningstar SMID Moat ETF.
Intuit Inc.
Intuit Inc.1 is the giant behind the U.S. small-business accounting software QuickBooks and the do-it-yourself tax software TurboTax. TurboTax and QuickBooks online sales have eclipsed their respective desktop sales, and Intuit Inc. has transitioned into a cloud-first company. This transition has enabled Intuit Inc. to leverage customer data to streamline the user experience across its disparate product set and natively market its full suite of offerings. As a result, the company scores high on switching costs and network effects. In Morningstar’s view, the recent pullback in the stock pushed the discount even farther below their estimate for fair value, as they believe many investors are underestimating the long-term potential of the company’s ability to expand its software ecosystem.
Intuit Inc. / 1 Year Price and Fair Value as of 3/31/2023
Source: Morningstar. Past performance is not a guarantee of future results.
Garmin
Garmin’s2 major revenue sources have shifted to its aviation and marine segments. The company’s fitness and outdoor segments are also major sources of revenue as they have benefited from the ascent of the smartwatch market. After shedding much of its auto segment, Morningstar believes the company will uphold excess returns on capital in the long term given its robust operating margins. Garmin’s narrow moat stems from the switching costs and intangible asset moat sources found in its aviation, marine, and outdoor segments. Like Intuit Inc., the stock has pulled back with other tech stocks and trades significantly below Morningstar’s estimate for fair value.
Garmin Ltd. / 1 Year Price and Fair Value as of 3/31/2023
Source: Morningstar. Past performance is not a guarantee of future results.
1 Intuit Inc. is 1.28% of net assets for the VanEck Morningstar Wide Moat ETF (MOAT) as of 4/28/2023.
2 Garmin Ltd is 1.39% of net assets for the VanEck Morningstar SMID Moat ETF (SMOT) as of 4/28/2023.
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