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Technology Stocks

Facebook merits a wide moat rating based on network effects

Facebook is the largest social network in the world, attracting more than 2.5 billion monthly active users. Mogharabi believes that the growth in users and user engagement, along with the valuable data that they generate, makes Facebook attractive to advertisers over both the short and long term. Mogharabi also highlights Facebook’s continued innovation that helps the business increase its user base and engagement. This innovation has taken the shape of additional features and apps to keep users engaged within the Facebook ecosystem. With more Facebook user interaction among friends and family members, sharing of videos and pictures, and the continuing expansion of the social graph, we believe the firm compiles more data, which Facebook and its advertising clients then use to launch online advertising campaigns targeting specific users.

Mogharabi also sees further economic tailwinds for the company as it is expected to benefit from an increased allocation of marketing and advertising dollars toward online advertising—more specifically to social network and video ads where Facebook is especially well positioned. The firm is also taking more steps to monetize its app portfolio while utilizing AI and virtual and augmented reality to drive further user engagement. This overall strength is driven by an ever-expanding social graph that helps the firm compile more data, which is used by Facebook and its advertising clients to launch targeted online advertising campaigns.

We believe Facebook merits a wide moat rating based on network effects around its massive user base and intangible assets consisting of a vast collection of data that users have shared on its various sites and apps. Facebook is a textbook example of how network effects can form an economic moat. It is worth noting that all the firm’s applications become more valuable to its users as people both join the networks and use these services. These network effects serve to both create barriers to success for new social network upstarts (as demonstrated by the firm’s success against Snap) as well as barriers to exit for existing users who might leave behind friends, contacts, pictures, memories, and more by departing to alternative platforms.

Mogharabi highlights the firm’s intangible assets as an economic moat source. These intangible assets are related to how much information the company has about its user base. Unlike any other online platform in the world, Facebook has accumulated data about everyone with a Facebook and/or an Instagram account. Facebook has its users’ demographic information. It knows what and who they like and dislike. It knows what topics and/or news events are of interest to them. With access to such data, Facebook is able to enhance the social network by offering even more relevant content to its users. This virtuous cycle further increases the value of its data asset, which only Facebook and its advertising partners can monetize.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Sony put an effort in building an ecosystem within its PlayStation business

With name recognition across the globe, a market cap above $130 billion, and a history of profitability, we understand how some readers may be surprised at our no-moat rating of the company. However, at the same time, we must observe the competitive landscape in which the company operates. Ito asserts that Sony does not have an economic moat as a large percentage of its products have very low switching costs, even though we identify economic moats in some parts of its business. In particular, we believe that consumer electronic products (25% of revenue) will be exposed to fierce competition with Asian manufacturers.

With many products in this part of the business being commoditized, and a replacement cycle of digital appliances being three to six years, it is generally difficult for consumer electronic companies to build up an economic moat that generates sustainable excess returns on capital.

At the same time, however, Ito positively evaluates Sony’s efforts in building an ecosystem within its PlayStation business. While PlayStation 4 accumulated shipments reached approximately 97 million units by the end of fiscal 2019, the number of PS Plus users exceeded 36 million. This not only gives Sony solid cash flows with which to improve the profitability of its gaming segment but also provides a hook for customers, leading them to again purchase a PlayStation console in the next generation.

Ito also notes strength in Sony’s sensor business that focuses on improving picture quality. As a result, Sony has increased its market share, owing to growing demand from handsets. This strength can be quantitatively illustrated in Sony’s dominance in the global market share for image sensors. Sony’s global market share in this space is estimated to be in excess of 50% with the second-largest player, Samsung, holding 18% of the global market share. Security and automotive (autonomous driving) fields are the next growth drivers for Sony’s image sensor business. A critical factor for both fields is high sensitivity under various difficult conditions, and so we believe Sony could leverage its strength to expand this business in the near term.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

Cabot is the only natural gas producer to earn a narrow moat rating

Meats believes that the firm’s assets are ideally located in the northeast portion of the play fairway, which mainly yields dry gas with very little oil condensate or natural gas liquids content in the production stream. This geographic advantage not only allows the firm to keep costs low but also maintain very high daily production rates. These advantages have enabled the firm to be among the lowest-cost natural gas producers in the Appalachia region, and this competitive advantage enables it to consistently deliver very strong returns on invested capital. Meats do advise caution, however. The company has drilling opportunities in the Lower and Upper Marcellus. The opportunities in the Lower Marcellus are far more lucrative but are expected to last until the late 2020s. This means that the firm will eventually pivot to opportunities in the Upper Marcellus that are typically up to 30% less productive. Meats asserts that when the firm does pivot to the Upper Marcellus, it will be able to reuse existing roads and pad sites, and as there are no well configuration constraints in this undeveloped interval, it could enhance returns by drilling longer laterals. As a result, we expect well costs to decrease enough to offset the dip in flow rates, leaving potential returns unchanged.

Cabot is the only natural gas producer to earn a narrow moat rating. The main reason for this rating is the firm’s low operating and development costs in the Marcellus Shale, which puts Cabot at the lower end of the U.S. natural gas cost curve.

ESG is an important factor to consider when looking at exploration and production companies. This is due to the downside risk ESG factors possess for such companies due to reputational and regulatory risks. Meats does not think that these issues threaten the company’s economic moat due to the 5%-10% spread between projected returns and Cabot’s cost of capital that provides a comfortable margin of safety. The most significant ESG exposure for Cabot is greenhouse gas emissions. While greenhouse gas emissions are unavoidable for oil and natural gas producers, Cabot has taken steps to reduce greenhouse gas emissions intensity in 2020 while also reporting zero flaring in the year. It is also worth noting that while consumers get more skeptical of fossil fuels, much of this aversion is directed toward coal. Natural gas, on the other hand, is less carbon-intense than coal but does not have the intermittency issues that plague wind and solar generators.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.               

Categories
Global stocks

Sompo Holdings nursing-care business expansion

Laptop with chart on its display at workplace of economist

• Medium-term growth could surprise the market to the upside if the integration of Sompo International continues smoothly.

• Sompo’s nursing-care business, while only a minor contributor to overall earnings at present, could provide a competitive advantage if it can be integrated with insurance products or if leveraging real-time data can allow it to generate new revenue sources.

Bears Say

• Sompo’s ambitious overseas expansion plans raise the risk of its overpaying for future mergers and acquisitions or acquiring targets that are difficult for it to manage.

• Because it is slightly smaller in domestic scale than Tokio Marine and MS&AD, this could be a cost disadvantage in the long term.

• Sompo’s historical connection to Nissan offers less advantage in developing future auto insurance products than competitors’ automaker ties, such as MS&AD’s connection to Toyota.

Company Profile

SOMPO Holdings, Inc. is a Japanese insurance holdings company. It is listed on the Nikkei 225. The firm is considered one of three top insurers in Japan. Sompo Holdings, Inc. provides property and casualty (P&C) insurance, life insurance, and nursing and health care services in Japan and internationally. It underwrites various P&C insurance products, including automobile and fire, as well as offers security, risk management, assistance, and warranty services; and life insurance products. The company also provides nursing care and healthcare services; and customer security, health, and wellbeing support services. In addition, it offers asset management services; home remodeling services; health support services comprising health guidance and health counseling, and employee assistance programs; and wellness communications services. The company was formerly known as Sompo Japan Nipponkoa Holdings, Inc. and changed its name to Sompo Holdings, Inc. in October 2016. Sompo Holdings, Inc. was founded in 2010 and is headquartered in Tokyo, Japan.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.