Bigger is Better: Technical Analysis For Value Investing
Besides having a cost advantage, and other competitive advantages which form a MOAT around a company. Companies can also gain the upper hand over their competitors simply by being bigger. Bigger certainly is better for companies you are looking to invest in.
Sometimes the sheer size of a company, in conjunction with the small size or niche like nature of the market it serves, is enough to deter potential competitors and to serve as a wide economic moat at a certain size a company achieves economies of scale.
Companies that are big fishes in small ponds often dominate the market and make good companies to invest into.
Often big companies have the advantage of more units of a good or service that can be produced on a larger scale, with lower input costs.
This helps reduce overhead costs in areas such as production financing advertising and so on.
Big companies that compete in a given industry tend to dominate the core market share of that industry, while smaller players are forced to either leave the industry or occupy smaller niche roles.
You know when a company has a relatively exclusive monopoly, for example, it means it controls the supply of a particular product or service within a certain location or industry.
This makes it very difficult for similar companies to get a foothold in the same market. Since the established giant in the neighborhood has already claimed most of the available customers and has sufficient size and resources to do whatever it takes to hang on to them.
In addition when a company is big and it has lots of cash flows it’s much easier for it to grow by simply acquiring other businesses.
A good example is Apple.
For example if Apple wants to develop a new headphone product line that will be used for upselling and increasing their lifetime customer value. They simply go out there and buy an excellent headphone business.
And yes they actually did. Apple bought Beats in 2014 for over $3 billion.
And now they have great headphone products to sell in their stores without spending too much time and effort building them.
You know it may take Apple’s competitors years to build the same headphone business. Yet they can simply now buy the company and instantly they have the technology, teams of people, and of course all the revenues and profits of the company. This also then increases the value of Apple, in this example, which likewise increase their stock price.
So they are essentially aquring the new company for free. When it goes right that is. When it goes wrong, like when Yahoo purchased BroadCast from Mark Cuban, then that is 5 billion dollars wasted and down the drain.
But when companies like Apple, and also Oracle, deploy this strategy of buying out their competitors it can be a remarkably effective way of completely dominating the market. Increasing their share price as they go, and bringing on new key employees as well as the technology they have been working on.
So that is just one of the ways that big companies have a big technical advantage over the competitors and why you should seek to invest in these types of companies.
Apple is clearly doing better than its rivals. As is Oracle.
And as a value investor you’ll want to invest in companies with a size advantage.