There are indeed monopoly in this world

monoply

The best moat is a monopoly

Monopolies do exist

Buffett said that a moat is the competitiveness of a business economy. Most companies have many competitors because a profitable industry attracts competitors to join in for a piece of the pie. This is the basic law of supply and demand in economics and the normal state of the capitalist market. In theory, it is unlikely that there will be a substantial monopoly, because the influence of a monopoly in any industry, and the huge profits that can be obtained are beyond what you and I can imagine.

This is also the main reason why all countries must have antitrust authorities. Therefore, in most countries, companies with monopoly nature are mostly state-owned enterprises, or enterprises that need to obtain business licenses issued by the ruling authorities, and limit the operating time, and must be re-examined when license expire; and their rates need to be supervised by the government. For those who are interested in the discussion of moats and corporate economic competitiveness, you can refer to the special chapter in Chapter 2 of my book “The Rules of Super Growth Stocks Investing“.

Three types of monopoly companies

It sounds like it is not easy to have a monopoly company. But even so, due to different factors and causes, there are still three types of monopoly companiesin the market.

Utitlities

The first category is state-run or public utilities that are supervised by the government: such as water, electricity, gas, telecommunications, transportation, etc., due to restricted rate, restricted operations and strict regulations, the profits will not be too high, but the revenue and profit are stable. They are easy to understand and are not the focus of this article.

With competitors but essentially monopoly

The second category is that there are obvious competitors in the market, but the strength of the competitors is too weak and the market share is disparate, forming a substantial monopoly of the leader in a specific field, because the competitors are really difficult to compete with the real monopoly.

Monopoly without competitors

This is the most difficult and is the focus of this article. It seems that it is really not easy, but there are really many cases in the market.

With Competitors but Substantially Monopoly Cases

For example, the following three well-known cases:

Microsoft

Microsoft’s (ticker: MSFT) personal computer operating system Windows and office software Microsoft Office have not been able to find equal rivals for three decades. Windows has more than 1.4 billion monthly active users, and Microsoft Office is used by 1.2 billion people. Alphabet’s (tickers: GOOGL and GOOG) Chromebook market share reached 12% at its highest in 2020, but the main users are elementary and middle school students in the United States, which cannot pose any threat to the Windows enterprise market at all.

Although Alphabet’s Workplace claims to have 2 billion users, the cloud version of the office product Workplace occupies 55.37% of the market, higher than Microsoft Office 365’s 44.44%. However, the vast majority of Workplace are free personal users, which can only put pressure on Microsoft’s cloud versions of Office 365 and Microsoft 365, but in the overall office software, the proportion is too low, it is really insignificant. The WPS of KingSoft (Shanghai stock code: 688111) under the Xiaomi Group in mainland China, where many functions are imitated by Microsoft Office, has 457 million users, but used only in China and developing countries.

Here are my post on this company:

Intel

Intel (ticker: INTC) has a market share of 77.8% of the x86-based CPU market in personal computers, much higher than AMD’s (ticker: AMD) 22.2%. Please note that Intel’s decline in recent years is due to the lag in manufacturing process and capacity supply, and whether x86 processors are competitive is two different things. Although AMD has made great progress in recent years, it has not actually affected Intel’s status in this field.

For nearly a decade, Microsoft has been vigorously encouraging non-x86 CPU manufacturers to sell the Windows operating system bundled with it at the time of shipment (because Intel also supported Linux, a potential rival that once threatened Microsoft, 20 years ago). Among these non-x86 architecture manufacturers are Qualcomm (ticker: QCOM) from the ARM camp. Microsoft has been selling personal computers for ten years, and has recently jumped down to design its own central processing unit; but these actions have not been effective.

Everyone needs to understand Intel’s x86 architecture CPU. The average retail price of a mid-to-high-end class is about US$200 to 300, but the ARM CPU is only about 1/3 to 1/5 of it. A PC with an ARM CPU costs only 60% to 70% of the price of an x86 architecture, but why is no one buying it? Because most of the programs you are using on your personal computer can’t be executed after you buy it, and the overall system performance is very poor. This is because Microsoft and Intel have cooperated for more than 40 years.

Not only Microsoft’s Windows and Office are developed for the x86 architecture, with decades of system optimization, plus astronomical third-party software from third-party manufacturers, it is impossible for a short period of time to be achieved. If these issues can be solved, it has been solved in the past ten years; and these burdens (for Intel, it is a moat) can not be solved by advanced processes or faster ARM CPUs.

Here are my post on this company:

TSMC

TSMC (ticker: TSM) manufactures wafers in “advanced-end processes”; if defined as below 7nm, TSMC’s market share reaches 90%; if defined as 12nm and below, TSMC The market share is still as high as 70% or more. Why talk about advanced process? Because the profit of the advanced process is much higher than that of the mature process. Samsung, which is currently barely a competitor in the industry, cannot form any competitive pressure on TSMC at all, and the situation will not change in the foreseeable five years.

As for the overall market share of wafer foundry, TSMC has been around 50% for the past two decades, and only a few years have fallen below 50%, ranging from 40% to 50%. If the mature process is included, TSMC’s overall wafer foundry market will account for 55% in 2021, and Samsung’s market will account for 17%. As for Intel’s catching up with the lag in process technology, it is mainly to meet the production capacity of its own x86 architecture central processing unit. It has never had any market share visibility in wafer foundry from the past to now.

The manufacture of wafers is not the production of chocolate or candy. An advanced wafer factory will cost 10 billion US dollars at every turn. It will take at least three years from the start of construction of the wafer factory to the real commercial operation. Moreover, in the future, the difficulty of this industry and the investment of capital and various bar is only going to get higher. In August 2021, TSMC unexpectedly issued a press release, raising the price of customer foundry charges by 20% immediately, without any buffer period — this is the right of a typical monopoly to increase prices, because customers are completely couldn’t find an alternative.

Here are my post on this company:

Monopoly without competitors

Common Features of True Monopoly Companies

This is a real monopoly created in a free and open market without any regulatory protection; it is also the focus of our discussion in this article. Some of the common characteristics of such a true monopoly are the following:

  • Companies are very low-key, not as well-known as Microsoft or Intel, and the average person may not even hear the name. But they are the big name in the industry to which they belong.
  • The product has been substantially monopolized for a long time, and the main product cannot find a competitive product in the market.
  • Has the power to increase the price of products at any time.
  • The company is very profitable.
  • The company’s long-term stock price return on investment is amazing, which is what investors care about most, and it is also what I want to point out in this article. Monopolies are not the type that can see their stock prices skyrocket by triple-digit percentages in a short period of time. But almost every one of them has a two percent long-term return on the stock price every year. If converted into an annualized rate of return, most of them are above 15%, which is an astonishing figure for long-term investors (annualized rate of return of 15% means that assets can double in 5 years, which is very scary ROI).

TickerShare priceP/EP/SLatest annual revenue growth rateROENet marginStock performance in past 10 years
ADBE442.3644.1313.2222.67%34.07%30.5%965.93%
ADSK204.591.3510.2615.76%111.9%30%409.47%
ACN324.9133.83.9814%32%11.5%314.69%
ASML650.6341.4513.2624.05%49.7%31.6%727.24%
WDFC193.4240.945.3119.49%32.9%13%251.29%

Table 1: Financial report and operation of companies without substantial rivals in the market (data compiled by the author)

Adobe

Adobe (ticker: ADBE) is synonymous with digital media and the industry’s unwritten standard with its main product, the Creative Cloud family (of which Photoshop is best known). It has existed for more than 40 years, during which time countless challengers have appeared and retreated, and even now countless manufacturers claiming to be their competitors appear every year, but no one has successfully caused any substantial threaten to it.

Digital media, the main product line of the Creative Cloud family, accounts for about 73% of the total revenue in 2021, and this part of the market has no qualified competitors. The digital experience product line that has been successfully expanded in recent years accounts for 27%. Since digital experience is a new industry field and there are many competitors, it is too early and difficult to say which one will stand out in the end; but Adobe is already in the leading group among the competitors.

Here are my post on this company:

Autodesk

Autodesk (ticker: ADSK) has developed a series of software necessary for the engineering industry, which is synonymous with engineering drawing, three-dimensional, and simulation. Its status is like the irreplaceable status of Adobe Creative Cloud family products among multimedia practitioners for more than 40 years.

Engineering (whether electrical and electronic, civil, architectural, computer graphics, animation) is a very highly specialized field of engineers, the working software that has won over decades of engineers’ critical, precise, professional, and meticulous filtering tests (if compared to Adobe, please note the user groups of the two sides are very differentthat, Adobe digital media users focus more on creativity, space, and imagination), it is impossible to change at all, and the important thing is that there is no alternative at all.

Here are my post on this company:

Accenture

Accenture (ticker: ACN), the McKinsey of the technology industry, has long monopolized the process improvement, transformation, and core enterprise projects of the global super-large enterprises. With super-high-quality human resources, coupled with the unique methodology developed by Accenture for the internal business processes of each industry, this is Accenture’s corporate DNA, and it is impossible for peers to copy it.

For large multinational corporations, Accenture may be their last straw, because Accenture has a group of senior practice consultants in each industry and special field, which can solve any of the most painful and critical needs of large enterprises. This is also the reason why companies are willing to pay several times the price for it, and it is also the fundamental reason why Accenture’s stock price has enjoyed a high price-to-earnings ratio for a long time, and the long-term annualized return of the stock price has reached 16% since its listing 20 years ago.

Here are my post on this company:

ASML

ASML (ticker: ASML) is a company that really chokes TSMC’s neck (the most profitable high-end process). It is the only vendor manufactures the extreme ultraviolet (EUV) exposure machine which is needed to produce advanced chip processes. The most important reason why the United States can impose a semiconductor embargo on China and prevent China from surpassing the United States in the future is the most important key to the production of this company.

At present, each extreme ultraviolet exposure machine with a cost of more than 100 million euros, the next generation of extreme ultraviolet Exposure machines are expected to reach more than 400 million euros each, and demand is still in short supply. The company only sells one product, but this product alone has allowed it to beat Applied Materials (ticker: AMAT) and began to top the market value throne of the global semiconductor equipment industry last year.

Here are my post on this company:

WD-40

WD-40 (ticker: WDFC)’s main product is WD-40. It can be said to be the “golden oil” for large and small mechanical supplies and precision electrical instruments. It is a universal maintenance agent for metal products. It cures all diseases and integrates six functions: rust prevention, dehumidification, rust removal, lubrication, cleaning, and conductivity.

It was originally invented for military use. The founder, Norm Larsen, after 40 unsuccessful adjustments to the formula, finally invented the most perfect formula on the 40th time, and used the name written on the experimental record, Water Displacement, 40th formula, named the product, its abbreviation is WD-40, and it has also become the name of the company. Its formula is a trade secret and has not been made public.

It was originally invented to be used as a water-repellent agent to prevent the rocket casing from rusting and corroding. It was later found to be surprisingly good for lubricating and reducing mechanical noise, rust resistance, and glue remover. This product has been very popular until now, and no real rival product has appeared so far.

The company’s market cap is only $3 billion, its profits are stable, its stock price is more rewarding than you and I can imagine, and it pays regular dividends. It mainly relies on WD-40, and it is not a necessity for people’s livelihood, nor is it a high-tech product. It is an industrial preparation that ordinary people despise and use; this really subverts most people’s views, which is also why I specially selected for this topic.

Here are my post on this company:

Fair Isaac

If you live in the US, everyone has a credit score, and if you don’t know doesn’t mean you don’t have one. Americans’ credit score is the product of Fair Isaac (ticker: FICO), which is used by “all large and small businesses related to consumer finance” to determine each person’s bank personal credit, auto loan, housing mortgage, credit card limit, also determine whether the bank should issue your credit card, and even some small and medium-sized enterprises use this score to decide whether to hire employees.

Its function is similar to Taiwan’s Joint Credit Information Center, but its functions and uses are much wider. To put it bluntly, it is a complex mathematical formula, but the calculation method can keep up with the pace of the times and the pulse of society at any time, and it is very smart. It has no rival so far, and companies that use it are often brought to court on antitrust charges, because these companies cannot live without it, but they hate being strangled by it.

Here are my post on this company:

monopoly
Credit: Pixabay

Next step

Due to the limited space of this article, we cannot give an in-depth description of the enterprises discussed in this article. For those who are interested in the discussion of special articles about these companies, you can click on my blog listed below to introduce the special articles about each company one by one.

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I am the author of the original text, the abridged version of this article was originally published in Smart monthly magazine.

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Author: Andy Lin

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