The Quality Series · part 7 of 13
Everyone talks about moats. In practice I use a simple test: can the business increase prices without losing the customer — and hold or grow its market share while it does?
That is what a moat means to me. Brand, network, switching costs, patents — they matter only in so far as they show up as pricing power. A business that has to follow its competitors’ prices has no moat, however good its product.
One other question sits beside it. Is the business a leader in its niche or its industry? Leaders tend to set the terms, with customers, with suppliers and on price.
Pricing power has a second benefit people underrate. A business that can raise prices is largely protected from inflation. And when it stops being able to — when gross margin starts to slip, or market share starts to go — that is usually the first sign the moat is weakening.
Here is what that looks like in two high-quality businesses, VeriSign and Visa — fifteen years of margins that rose, or held near the top.
VeriSign, 2010–2025: gross margin up from 77% to 88%, operating margin up from 37% to 68%. Rising margins are what pricing power looks like in the accounts.
Visa, fiscal 2010–2025: a gross margin above 94% every year, and an operating margin up from 56% to 67%. When there is little room left to rise, pricing power shows as margins that hold.
For contrast, a business that sells what everyone else sells — a price taker, as every commodity producer is.
Freeport-McMoRan, 2010–2025: operating margin from 48% down to 0.4%, back up to 24%, down to 4%, then up to 37%. A copper miner takes the price the market sets, and its margins go wherever copper goes.
Next: three ways a business can grow its cash flow per share, and who is driving each.
The series so far
- Part 1: The whole idea, in one line
- Part 2: Same five years, very different businesses
- Part 3: From great business to great investment
- Part 4: Where stock returns actually come from
- Part 5: The secret sauce
- Part 6: Why return on capital decides it
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This is my personal investing journal, written for information only. It is not investment advice or a recommendation to buy or sell any security, and it does not take account of your circumstances. I may own shares in companies I write about. Past returns are no guide to future returns.
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