By Brandon Rakszawski
Director of Product Management
Although not always easy to quantify, intangible assets are one of the primary sources of strong competitive advantages for businesses and a key source of economic moats.
The term “economic moat” describes a company’s ability to maintain its competitive advantages and defend its long-term profitability. This moat investing education series explores the five primary sources of moat, according to Morningstar: 1) switching costs; 2) intangible assets; 3) network effect; 4) cost advantage; 5) efficient scale. Here we explore the concept of intangible assets.
Intangible Assets Help Build Strong, Identifiable Advantages
Patents are a legal barrier to entry that protect companies from unauthorized commercial usage of their products by competitors. Similarly, government licenses may raise the entry hurdles for new competitors. Additionally, brands equity can increase a customer’s willingness to pay for a product or service. These are examples of what Morningstar refers to as “intangible assets.”
Intangible Assets. Patents, brands, regulatory licenses, and other intangible assets can prevent competitors from duplicating a company’s products, or can allow the company to charge a significant price premium.
Although not always easy to quantify, intangible assets are one of the primary sources of strong competitive advantages for businesses and a key economic moat source. Intangible assets can include corporate intellectual property, such as patents, trademarks, copyrights, government licenses, and business methodologies that help companies generate economic profits.
Intangible Assets in Action
Starbucks Corp. (SBUX) is the leading specialty coffee retailer in the world. According to Morningstar, Starbucks “boasts a wide economic moat, with brand strength (evidenced by pricing power), attractive unit-level economics, successful international replication, and strong results in the retail channel underpinning its brand intangible asset.” Morningstar adds, “The firm’s ability to generate excitement and traffic, evidenced by impressive comparable sales growth in the core U.S. market, while spending less on marketing than category peers, reinforces the importance of the brand and its impact on results.”
Eli Lilly and Co. (LLY) is a pharmaceutical company that focuses on neuroscience, endocrinology, oncology and immunology. Patents are critical in preventing competitors from duplicating its drugs. Morningstar notes that “patents, economies of scale, and a powerful distribution network support Eli Lilly’s wide moat. Lilly’s patent-protected drugs carry strong pricing power, which enables the firm to generate returns on invested capital in excess of its cost of capital.”
Originally published by VanEck on 27 September 2022.
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Company-specific information based on Morningstar analyst notes last updated as follows: Starbucks Corp.: 8/5/2022; Eli Lilly and Co.: 5/2/2022.
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