Apple has one of the widest strategic economic moats in the history of business. While Facebook, Amazon and Google are serious about their own unique moats, Apple is in a “moat league” all on its own.
The concept of a business moat was coined by Warren Buffett…
Indeed, Apple’s massive moat may be one of the reasons why Berkshire Hathaway bought 9.8 million shares of Apple in Q1 2016 at around $109 each.
At the time, Apple had P/E ratio of only 9x and had approximately $239 billion in cash.
Since 2016, Berkshire has increased its holdings in AAPL thirteen fold to 130,000,000 shares, and the value of Apple’s stock has increased by over 50%.
What is a Business Moat?
A business moat, or economic moat, is a business’ ability to protect itself from industry competition by nature of its advantages or superiority in areas such as pricing power, branding, switching costs, high customer satisfaction rates, network effects, market share, etc.
Below is a definition of an “economic moat” from Investopedia:
Investopedia Definition of Economic Moat: A moat is the competitive advantage that one company has over other companies in the same industry; this term was coined by Warren Buffett, a renowned investor and executive at Berkshire Hathaway. The wider the moat, the larger and more sustainable the competitive advantage of a firm. By having a well-known brand name, pricing power and a large portion of market demand, a company with a wide moat possesses characteristics that act as barriers against other companies.
It seems to me that Apple has incorporated moats in its business strategy for a long time…
And Apple’s moats have nothing to do with the company’s ability to cut prices to fight for market share.
Apple never competes on price.
I used to think that Apple might buy a wireless carrier… It certainly has the resources to do so. But then I realized that wireless carriers selling “dumb pipes” are, for the most part, commodity offerings.
To the contrary, Apples is an expert at building moats around premium offerings.
Not only does Apple exploit its moats, the composition and complimentary nature of Apple’s web of moats has evolved over time.
And Apple has built new, incremental moats on top of older existing ones.
How many moats does Apple have?
Here is a list of Apple’s many different types of moats:
- The Apple brand is a moat.
- The company’s faithful, loyal fan base is a moat.
- Apple’s pricing power is a moat.
- Its vertical integration strategy is a moat.
- The company’s secure “walled garden” approach to its operating systems for both desktop and mobile are a moat.
- Vertical integration and tight control over both hardware and software is a moat.
- The company’s emphasis on data security and user privacy of user data is a moat.
- Placing a premium on good industrial design is a moat.
- Exceptional retail leadership and distribution is a moat.
- Apple’s microchip manufacturing prowess is a moat.
- Sustainability and commitment to the use of renewable energy is a moat.
- Apple’s healthy dividend and $270 billion cash hoard is a moat.
iPhone is potentially the most significant moat. To examine the power of Apple’s iPhone moat, look at what happens every Q1 of Apple’s fiscal year in terms of iPhone sales.
A supercycle occurs followed by a new, higher standard of iPhone sales, year after year. While supercycles may not be alike in terms of timeframe, I believe supercycles will recurring.
But not everyone agrees with me that Apple uses moats.
Oddly enough, strange article from 2014 once claimed that Apples had no moats and that the company saw itself as an agile fighting force, not playing defense.
But Apple is actually masterful at defense… and the master of the slow invasion.
As a result, Apple has created possibly the largest economic moat in history comprised of a series of concentric moats to protect itself from competitors.