TKO Group Holdings, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

TKO Group Holdings is a premium sports and entertainment company that owns and manages global sports and entertainment properties, including UFC and WWE.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

TKO Group Holdings, Inc. (“TKO”), formed by the combination of UFC and WWE, is a powerhouse in the sports and entertainment industry, operating through two segments: UFC and WWE. This merger created a diversified portfolio of content and events. UFC, a premier mixed martial arts organization, delivers live events, pay-per-views, and a growing slate of content. WWE focuses on global entertainment, offering a vast range of content through broadcast, pay-per-view, live events, licensing, and consumer products. In 2023, the combined company generated significant revenue, placing it at the forefront of global sports and entertainment.

Revenue Distribution:

TKO’s revenue streams are diverse and complex:

Media Rights and Content: This represents a substantial portion of TKO’s revenue and includes licensing of content to media partners (both domestic and international), streaming services, and other digital platforms.
Live Events: This includes ticket sales to live events and is primarily impacted by the number, size and location of events. Both UFC and WWE have large and diverse live event businesses.
Sponsorship: TKO generates significant revenue through sponsorships and advertising partnerships that include everything from apparel companies, automotive manufacturers, and gaming companies.
Consumer Products: TKO also has a notable retail presence with consumer products, including merchandise, apparel, video games, and collectible items associated with its brands.

Industry Trends:

The sports and entertainment industry is dynamic and undergoing rapid transformation. Here are key trends influencing the business:

Streaming: The growth of digital and streaming platforms has changed consumption patterns, as viewers demand access to content across different devices and formats. This trend affects both the delivery and profitability of live events, and may necessitate direct-to-consumer strategies.
Digital Media: The rise of social media and other digital channels are important for marketing, promotions, and audience engagement.
Globalization: The sports and entertainment market is increasingly global, meaning international and emerging markets are becoming important for both content distribution and live events.
Consolidation: The industry has seen increased consolidation, and smaller operators are often targeted for acquisition. There is also a growth in companies building brands to then be sold off for their brand power.

Competitive Landscape:

TKO operates in a competitive landscape with varying degrees of competition within each of its segments.

In UFC’s corner, they compete with other mixed martial arts promotions and related sports events.
For WWE, they face competition from other sports entertainment companies.
More broadly, there is competition with various other forms of entertainment, as viewers are increasingly selective of where they spend their attention and money. This competition forces TKO to continually innovate and expand into different revenue streams. Some key competitors include other sports leagues, large media conglomerates, and specialized entertainment firms.

What Makes TKO Different:

TKO benefits from a unique combination of factors:

Dual Brand Portfolio: Owning both the UFC and WWE provides TKO with unique leverage and reach. Although both are sports, the products and demographics are different, allowing TKO to effectively cater to different markets.
Global Reach: TKO’s global presence and the reach of its events create significant revenue.
Content Creation: TKO produces a vast amount of content including videos, shows, live events, and other forms of digital media.
Synergies: With the merger of UFC and WWE, TKO is able to unlock some operational synergies.

Financials In-Depth:

Here’s an overview of TKO’s financials, based on the latest 10Q filings (September 30, 2023) and other available sources:

Revenues: For the three and nine months ended September 30, 2023, total revenues were $1,484,000 and $4,226,000, a significant increase compared to 2022. The Media segment accounts for roughly half of the total revenue for both the interim and year-to-date periods. Revenue from live events is second.
Operating Expenses: A major part of revenue is offset by operating expenses. Some major expenses include direct operating costs, costs for production, sales, general and administrative costs, and depreciation.
EBITDA and Net Income: For the three months ending September 30, 2023, TKO reported $592,250 of Adjusted EBITDA and a net loss of approximately $55 million attributable to the TKO Group Holdings. For the nine months ending September 30, 2023, TKO reported $1,185,180 of Adjusted EBITDA and a net income of $211,391 attributable to TKO Group Holdings.
Balance Sheet: As of September 30, 2023, TKO reported total assets of $12,989.7 million and total liabilities of $11,389.9 million, leading to equity of $1,599.8 million.

Recent Concerns and Management Stance:

Acquisition Costs and Integration: The WWE-UFC merger has been complex, requiring integration of staff, operations, and systems. The costs associated with the merger may suppress profitability.
Lawsuits and Investigations: The company has been engaged in several ongoing lawsuits and investigations which includes federal, state, and other related investigations. This puts the company at risk for significant legal and financial penalties, reputational risks, and other consequences. These issues have been noted as ‘unpredictable’, which makes their effect hard to predict in financial statements, which is worrisome.
Dependence on Key Stars: WWE relies heavily on a small number of recognizable stars, and a potential departure or decline in their performance could affect revenue. UFC stars are a bit more diverse, though, if any big names retire it could affect revenues.
Potential Weakening of Moats: The company relies on strong brands and regulatory/legal protections (especially for WWE’s business). However, these moats could be diminished because of the growth of new competitors and a changing market landscape.
Content Licensing Revenue: While a strength of the business, this is also a weakness. A majority of the revenue (approx 50%) is generated from Media licensing, which has its risks. There is no consistent renewal of agreements each year, and the loss of media rights to any major streaming platform/channel, will hurt revenues directly. It is a significant vulnerability to competitors.

Management, overall, feels good about the performance, the acquisition of WWE is a strong positive for the long-term and provides strong levers that should be profitable into the future. They are aiming to reduce debt, reduce expenses, continue to grow revenue, and use the unique synergies to their benefit. The management are aware of current issues and risks to profitability, and are working towards correcting those issues.

Moat Rating: 3 / 5

TKO has a moderately strong economic moat (3/5 rating).

Strengths: TKO’s unique portfolio of powerful brands, extensive distribution networks, the value of its content, and customer switching costs.
Weaknesses: Some challenges include vulnerability to new competition, and limited barriers to entry in some of its operating segments. Management relies heavily on brand names, and the legal issues also bring about some uncertainties.

Understandability Rating: 3 / 5

TKO has moderate understandability (3/5 rating). The business model, though diversified, is reasonably easy to grasp, and they rely on the strength of their brands, which is easy to comprehend. The complexity lies in the legal environment, various different financial instruments they utilize, and the impact of the recent acquisitions.

Balance Sheet Health: 4 / 5

TKO’s balance sheet is good with some positive signs, having high assets but also high liabilities(4/5 rating).

Strengths: High revenue levels and some good profitability, but the liabilities offset the cash generation. They have good operational cash flows that they are looking to continue to generate.
Weaknesses: High debt to equity as a consequence of recent acquisitions, which has increased the leverage ratio and debt-to-EBITDA ratio (more details on this below).

Additional Notes and Explanations:

Debt: The increase in long-term debt from 2022 to 2023 is due to the acquisition of WWE. This means that their operations are more heavily leveraged, and more exposed to interest rate risks.
Leverage: They have a relatively high debt-to-EBITDA ratio, at almost 5. This means that there is more debt financing than earnings. This may create issues in the future if the business experiences setbacks.

The business is still in an integration phase, and further results are yet to come. If they can fully utilize their synergies and unlock all the value that the acquisition of WWE has promised, this business will be far stronger in the future.

The Essays of Warren Buffett: Lessons for Corporate America | Moat: 5 / 5 | Understandability: 1 / 5 | Balance Sheet Health: 5 / 5

This book is a curated collection of Warren Buffett’s essays, providing insights into his investment and business philosophies, though not representing a business entity itself.

Business Overview:

“The Essays of Warren Buffett: Lessons for Corporate America” is not a company or a business in the traditional sense, but rather a compilation of Warren Buffett’s writings. This compilation of essays and letters provides insights into his thinking about corporate finance, investing, and business. Warren Buffett, the Chairman and CEO of Berkshire Hathaway, Inc, is renowned for his value investing style and long-term perspective.

Key Themes:
- Value Investing: Focusing on purchasing companies at a discount to their intrinsic value, which is the value derived from their business operations.
- Corporate Governance: Stressing management accountability, ethical behavior, and the importance of a strong owner-operator culture.
- Long-Term Thinking: Emphasizing the importance of long-term business success rather than short-term market gains.
- Business Fundamentals: Focusing on understanding a business deeply, including its economics, management, and competitive advantages.

Competitive Landscape:

This is an instructional book and so there aren’t any real competitors, other than other similar books. Books similar to this include:

“Security Analysis” by Benjamin Graham and David Dodd - a detailed guide on valuing securities, with a focus on fundamental analysis.
“The Intelligent Investor” by Benjamin Graham - practical guidance on investing and an approach focused on value investing, with lessons on market behavior.
“You Can Be a Stock Market Genius” by Joel Greenblatt - a look into specialized investment strategies and techniques.

What Makes It Different:

Unique Author: Warren Buffett is one of the greatest and most well-known investors, making this a book of extremely high-value insight.
Practical Wisdom: The essays aren’t just a theoretical text, but rather reflect real-world experiences and practical wisdom.
Long-Term Perspective: Buffett provides insights that are timeless. He is very much against short-term trades and speculation.
Clarity and Transparency: The writings offer a direct look into the investment philosophy that has guided the enormous success of Berkshire Hathaway.

Financials In-Depth:

Since it’s not a company, it’s very difficult to analyze the financial data. The revenue in books depends on many factors that are unpredictable.

Revenue Generation: The book generates revenue through its sale. There’s no regular subscription model, and revenues are dependent on sales of this product.
Expenses: The expenses of this book are primarily the costs associated with writing, publishing, marketing, and distributing.
Balance Sheet: Since it’s not a company, it doesn’t have a balance sheet.

Moat Rating: 5/5

The information in this book is an incredibly strong moat with a five-out-of-five rating. There are a few factors that play into that:

Intellectual Authority: The author, Warren Buffett, has a unique level of expertise and success in the investing world, meaning the content of the book is valuable and extremely hard to replicate.
Longevity and Relevance: Buffett’s insights and philosophies, based on his value-investing methods, are timeless and will remain relevant for decades to come.
Unique Content: The curated information has been gathered from annual letters and other sources, providing a unique perspective that can’t be acquired by reading many different books.

Understandability Rating: 1 / 5

This book has a understandability rating of 1/5, since it’s easy to comprehend. These writings are presented in clear and straightforward language, which makes it accessible to readers with varying levels of financial expertise. The value is clear for a large variety of investors.

Balance Sheet Health: 5 / 5

This book has perfect balance sheet health (5/5 rating), since it is a book, and not a company. There are no financial risks involved in its existence.

Additional Notes and Explanations:

Educational Resource: The essays act as an educational resource for investors and business executives, with lessons on value, long-term performance, and management ethics.
Investment Philosophy Foundation: The book is not a how-to-get-rich-quick scheme, but rather a guide to how to better understand the market and create a robust investing foundation based on practical wisdom.

It’s crucial to note that, while “The Essays of Warren Buffett” provides profound investment insights, it’s a guide to help readers form their own opinions, and learn how to value a business.

Common Stocks and Uncommon Profits and Other Writings (Philip A. Fisher) | Moat: 4/5 | Understandability: 2/5 | Balance Sheet Health: 5 / 5

This investment book is a foundational text on growth stock investing, presenting practical approaches and insights rather than operating as a business itself.

Business Overview

“Common Stocks and Uncommon Profits and Other Writings” by Philip A. Fisher, originally published in 1958, is an iconic book in the investment world, serving as a guide for evaluating growth companies. This classic book focuses on finding and understanding high-quality growth stocks. However, this is not a business, but an informative text about value-investing, and especially growth investing.

Key Ideas:
- Scuttlebutt Method: The most popular concept by Fisher, which emphasizes the need for investors to thoroughly research companies by going directly to various sources, and not just relying on numbers in financial statements.
- Focus on Growth: Fisher advocates for identifying companies that possess great potential for long-term growth, which is a contrast to a more value-oriented approach.
- Management Quality: The writings highlight the importance of identifying talented and ethical management.
- Durability of Growth: The book emphasizes on buying firms that have long-term durability of earnings.

Competitive Landscape

The book is a part of the Wiley Investment Classics and competes with many other books on investing. Some notable titles include:

“The Intelligent Investor” by Benjamin Graham - a practical guide to value investing and assessing securities with a focus on understanding margin of safety.
“Valuation: Measuring and Managing the Value of Companies” by McKinsey & Company - a handbook for investors to understand value creation with several examples and complex formulas.
“The Little Book That Builds Wealth” by Pat Dorsey - a book highlighting “economic moats” and how they help investors in assessing companies.

What Makes It Different

Growth Investing: This book mainly focuses on finding and assessing growth stocks.
Qualitative Analysis: Emphasis on qualitative metrics that help evaluate business, management, and long term growth potential.
Practical Approach: Fisher emphasizes on thorough research into all aspects of a company and a focus on understanding the business.
Influence: The text is revered by long-term growth-focused investors.

Financials In-Depth

This is not a company and so is not analyzed as one, so there are no balance sheets, income statements, or cash flow information to review. Revenue is solely generated by book sales and royalties.

Moat Rating: 4 / 5

This book has a solid, wide moat, with a rating of 4/5, because:

Influence: Its concepts such as the “scuttlebutt” method and focus on management qualities still have an influence on investors in today’s market.
Reputational Strength: The author is a well-regarded individual in the investment community, and is extremely respected and credible, making the book a highly useful resource.
Long Lasting Value: The ideas of the book have continued to remain highly valuable and are not time-sensitive.

Understandability Rating: 2 / 5

The understandability rating for this book is a 2/5. There are some complex strategies mentioned in the book, such as the “Scuttlebutt” method. Also, the book does have a lot of concepts that must be fully understood to apply in the stock market. However, with some time and dedication, and most importantly, by re-reading, one could gain a lot of information.

Balance Sheet Health: 5 / 5

This book does not have any balance sheet, nor is it a company, which is why its health is 5/5.

Additional Notes and Explanations:

Focus on Long-Term: Fisher’s emphasis on holding onto stock, until its long-term potential weakens.
Avoidance of Fads: Discouraging short-term speculation, hype and momentum stocks, and focusing on businesses with the potential to compound for decades.
A Checklist Approach: The “fifteen points” serve as a checklist for analyzing whether or not a company has long-term potential and is worth buying.

This book has had a large impact on various investors who believe in long-term growth. It has had a big impact on value-investing and has cemented its spot as one of the most influential investment books of all time.

Valuation: Measuring and Managing the Value of Companies | Moat: 4 / 5 | Understandability: 4/5 | Balance Sheet Health: 5 / 5

This book, “Valuation: Measuring and Managing the Value of Companies,” is a comprehensive guide to valuing companies, providing techniques and frameworks; it is not a business entity itself.

Business Overview

“Valuation: Measuring and Managing the Value of Companies” is a very influential guidebook for investment and finance professionals on value creation and company analysis. This academic text is meant for those who already understand some basics, so you need to have a basic knowledge to get the full insights of the book.

Key Principles:
- Value Creation Drivers: This book focuses on long term revenue growth and ROIC, as well as the cost of capital.
- Discounted Cash Flow (DCF): It stresses on using the DCF method to arrive at an accurate value for a company, including its equity value.
- Advanced Valuation Techniques: The book has a complex and extensive view of various valuation techniques, including the adjusted present value (APV) approach, multiple valuation methods, and real options, providing a more complex view of evaluating businesses.
- Economic Profit: It also describes how using the economic profit is a much more sensible idea than using earnings or other accounting metrics.
- Practical Examples: The text provides several cases to illustrate their theories in action.

Competitive Landscape

As a text, “Valuation” competes with other books used by finance and business professionals. Some of the competing titles are:

“Corporate Finance” by Richard Brealey, Stewart Myers and Franklin Allen- textbook detailing various finance methods, including capital structure, corporate strategy, and valuation.
“Damodaran on Valuation” by Aswath Damodaran - A book written by a professor to value companies. It goes into detail into accounting tricks and different ratios.
“Investment Valuation” by Aswath Damodaran - a detailed guide on valuing companies. It covers a plethora of methods in depth.

What Makes it Different

Rigorous Approach: Provides a rigorous and systematic guide to valuing a business.
Quantitative Focus: More heavy on quantitative methods, than many other books.
Real-World Examples: Utilizes several examples from all types of industries.
Comprehensive Guide: This text covers all forms of valuation, making it useful for financial professionals and aspiring investors.

Financials In-Depth

There are no financial records to analyze, since this is a book and not a company.

Moat Rating: 4/5 This book has a good moat, earning a score of 4/5 due to:

Practical Application: The book is widely used for its practicality in valuation.
Academic Rigor: The book provides a high quality of information, with advanced math.
Authority: Written by professionals at McKinsey & Company, it is treated as an authority.

Understandability Rating: 4 / 5

Although complex, this book has an understandability of 4/5, due to the structured and step-by-step approach, and the clear examples. This makes the material a bit more digestible.

Balance Sheet Health: 5 / 5

Since it is not a company, its balance sheet is perfectly healthy (5/5).

Additional Notes and Explanations:

Focus on Free Cash Flow: Provides detail into discounted cash flow valuation methods.
Importance of Intrinsic Value: The book strongly reinforces focusing on the intrinsic value of the firm rather than just relying on speculation.

This book is not about stock selection, but instead focuses on valuation and how to find the value of a company, giving any reader solid information to go forward in value investing.

Buffett on Moats: A Review

Based on the document provided, let’s do a detailed overview of Warren Buffett’s take on moats and how he views moats.

Key Concepts:

Definition: Buffett defines a moat as a company’s competitive advantage, i.e., “what other people might call competitive advantage…It’s something that differentiates the company from its nearest competitors.”
- This is a big part of what separates the best companies, as opposed to just a company that is doing well at a particular moment.
- He also notes that there are economic moats and “castle” moats which he describes as an economic moat having the characteristic of lasting for long time, creating a “terrifying economic castle”.
Durability: The durability of a moat is paramount to the success of a business. This should also be a factor in assessing the business.
- He also says that a “moat must be continuously rebuilt” meaning it is an ongoing process and the company can’t stay complacent.
Analogy to Castles: Using the analogy of a medieval castle, Buffett suggests that moats (ideally) should be deep and wide to fend off competitors, and if they are eroding they are less valuable.

Moat Characteristics According to Buffett:

Fending Off Competition: He looks for moats that keep competitors at bay, preventing them from easily entering the market or replicating their products/services.
- The best moats make it very hard, if not impossible, for a competitor to gain traction.
Sustainable Profits: Moats ensure that companies maintain high return on invested capital for a prolonged period of time.
- Buffett thinks that good returns on invested capital is what makes the difference between good businesses and great businesses.
Adaptability: Although moats can be wide and deep, they are still subject to changes in the market, so even the best moats should be constantly monitored for deterioration.
Management: While moats exist at a business level, management also plays a role. Management should take steps to widen the moat, but often focus on the operations of the business as well as making sure that they don’t damage existing moats.

“Wide Moat” & “Narrow Moat”

While not explicitly defined, the document refers to “widening or narrowing” moats, implying an understanding that competitive advantages are not static, and that depending on the business, moats can also be either “wide” or “narrow”. A wide moat will generate exceptional profits and have lower risks of erosion of the moat. A narrow moat, while still valuable, may not be as defensible.

Examples:

He says that the most important thing to look for is how “big a moat” there is, where there is a lot of protection around the business, which makes it unlikely to be touched by competition.
He also states that “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital.”
He gives examples of companies with moats, such as “castles” by stating that it “protects a terrific economic castle with an honest lord in charge of the castle.” This alludes to strong companies with good management.
Focus on Sustainability: Buffett is more concerned with long-term sustainability than profitability at a particular moment. He looks for businesses “that have sustainable wide moats around them” because these are the ones who “will provide the most growth of value over the long term.”
- He reiterates this by noting that “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage”.

How to Spot Moats:

Look for Differentiation: Identify companies that are able to differentiate themselves from competitors, whether it’s in terms of service or product, and those who can’t be copied by other players in the industry.
Assess Durability: Focus on companies that have shown that their competitive advantages are sustainable over time and can last a long time into the future.
Prioritize the Moat: Prioritize understanding a company’s competitive advantage over merely chasing high growth or an attractive industry. This is very important to Buffett and his investment strategy.
Evaluate Barriers to Entry: He suggests looking at the barriers to entry that companies have created in their businesses, such as high upfront investments and hard-to-achieve competitive dynamics. These are strong sources of competitive advantages.

Overall Buffett’s perspective on moats is that they are crucial in determining the long-term profitability of companies. He believes that identifying them is a more powerful driver of value than just chasing growth. And a focus on value investing, rather than speculation, makes it important for any long-term investor to have.

Checklist for Measuring Sustainable Value Creation

Here’s an interpretation of the checklist provided, structured to outline essential questions for assessing a company’s long-term value creation:

Introduction:

Does the company earn an ROIC above its WACC? This is the basis for creating shareholder value. If the return on capital exceeds the cost of capital, the company is generating value.
Is the ROIC rising, falling, or stable? Is the company able to sustain the profitability, and can it improve on the margins as well.
Why are you not relying on the stock price alone? Do not solely rely on the stock price, which can be influenced by sentiment, rather than the value of the company. You need to see what is creating the value, and not just the share price.

Why Strategy Matters:

What is the ROIC for the industry, and what is the trend? Comparing against the industry lets you know how a company performs relative to its peers and understand what type of business they are in.
What is the variance in ROIC for the industry? There may be less variety or a great deal of variety depending on the industry, you can then better assess the dynamics.
What is the industry markup and has that changed over time? The amount by which companies can raise prices tells a lot about the competitive dynamics of the industry.

Industry Analysis (Lay of the Land):

How do companies interact with one another? Is it a highly cooperative, or competitive market? What are the economic structures of the market?
What is the aggregate economic profit, and how has it evolved? What are the long-term trends of the market? Has it become more profitable over time?
What have been the historical trends in market share? Understanding market dynamics and how market shares have changed is crucial.
How stable is market share among the competitors? Is it a market that is hard to penetrate, with strong brand loyalty? Or is it easy to get in or out of?
Has industry concentration changed? A change in the amount of concentration might indicate a shift in the competitive balance.
How would you categorize the industry structure and strategic opportunities? Depending on whether the industry is in an emerging or declining phase, the strategic options that may be available to the management may differ.

Three of the Five Forces—Bargaining Power of Suppliers, Bargaining Power of Buyers, and Threat of Substitution:

How much leverage do suppliers have? This indicates how easy it is for suppliers to dictate terms. The larger their power, the more the input costs may rise, which may impact profitability.
Can companies pass on price increases from their suppliers? Companies who are able to pass price increases will have far more stable returns in the long-term.
How much leverage do buyers have? How much pricing power the buyers have and how easy it is for them to change their suppliers.
How informed are the buyers? More informed buyers will be able to spot high margins and underperforming firms.
Are there substitute products? Does a business have to worry about being supplanted by a different offering in the marketplace.
Can you identify the source and size of switching costs? How much of a hassle is it for customers to switch products or services. Higher switching costs can have a great effect on a company’s economic moat.

Threat of New Entrants and Barriers to Entry:

What is the history of entry and exit in the industry? Is it easy to enter into the market, or is there a high bar? This will provide evidence of barriers to entry.
Have you considered a decision tree from the point of view of a potential entrant? You must analyze and understand a company from the view of their competitors or new market entrants.
Are incumbents known to be aggressive in deterring entry? If the incumbent is aggressive, it will be harder for new firms to break into the market.
How specific are the assets in the industry? Asset specificity can make it hard to move business to other ventures if a company is struggling. This impacts the flexibility of a company and might affect its moat.
What is the level of minimum efficient scale? There could be high or low economies of scale that the company is working with. This will provide an idea of how big the competition must be to try and be competitive.
What is the link between minimum efficient scale and total addressable market? If minimum scale is high, this tells you that only a few players may operate in the market.
What is the link between minimum efficient scale and changes in market share? Are the market shares of each company relatively stable? This may indicate high or low barriers to entry.
Are there network effects, and if so, how strong are they? Network effects are extremely powerful sources of competitive advantages.
Do incumbents have precommitment contracts? Precommitment contracts lock in customers and suppliers, so their value is greater than that of a company who doesn’t have them.
Do incumbents have valuable licenses or patents? Do competitors have to spend significant time and resources to enter into the marketplace?
Have incumbents benefited from the learning curve? Do companies improve efficiencies over time, or is their performance flat?
Have incumbents entrenched themselves by shaping regulation? If incumbents have a lot of regulatory capture, this may provide a very strong moat against competitors.

Rivalry Among Existing Firms:

Is there tacit coordination for pricing and capacity addition decisions? If pricing and capacity expansions are predictable, this may show that competitors are more likely to work with one another, than against.
How frequent is company interaction? Do the competitors frequently interact, and does that make competition less severe?
Does the industry have a leader focused on maintaining an attractive structure? What is the primary focus of incumbents, and do they take action to stop negative competitive behaviour?
How similar are the firms in terms of incentives, time horizon, and ownership structure? If incentives for employees are similar, this may produce more cooperation.
How variable is industry demand? Industries with higher cycles may lead to difficult business environments.
Are fixed costs high? High fixed costs mean that companies have a greater level of leverage.
Is the industry growing? If the industry is not growing, then profits would likely come at the expense of other players, leading to aggressive competitive tendencies.

Disruption and Dis-Integration:

Might the industry be susceptible to a disruptive innovation? It is important to consider if new technological disruptions may cause incumbent market share to be disrupted.
Are sustaining innovations improving faster than consumer demands? If it is, the new incumbents have created a better value proposition.
Are incumbents motivated to either flee or ignore segments of the market? This indicates if the incumbents are being affected by the new competition and whether they are able to withstand it.
Is the industry organized vertically, or has there been a shift to horizontal markets? How important is vertical integration in this market and how it may or may not affect the ability of a firm to have higher competitive advantage.

Firm-Specific Analysis:

Have you analyzed the value chain of activities? How does the firm deliver its product or service? Analyzing its activities will let you know if their processes are creating value.
Have you created a map? What are the factors that affect the firm’s profitability and does the firm have an understanding of these factors?
Have you compared the focal company to peers? Comparing to other companies helps assess performance.
Are there points of differentiation? Is the company truly differentiated or is it merely copying other businesses? This will play a big role in the company’s moat.
Does the company increase willingness to pay? Does the company create unique value that others cannot duplicate, allowing it to increase the price of its offerings?
Are there network effects? If a business benefits from network effects, this will lead to a stronger moat.
Are there complementary products and is their cost going up or down? Complementary products often affect the business, and their economics play a significant role in the profitability of a business.
Do the company’s products provide prestige, promote habit, or lower search costs? Does the company’s products encourage customer satisfaction, and reduce the cost of obtaining their services and products?
Is there lock-in that creates switching costs? If so, what type of lock-in is it? The different types of switching costs create barriers against competitors.
Is the company focused on increasing WTP versus just pricing power? Are they actually trying to make their customers happier, or are they just trying to maximize profits using the power they have.
Does the company lower supplier costs via data sharing? Data is a critical advantage, and firms with access to unique information on their suppliers and distributors have a competitive edge.
Does the firm have access to unique inputs such as patents? Unique assets are hard to replicate and form a base for moats.
Is the company more productive than its peers? More efficient companies have a greater source of competitive advantage.
Are assets and revenue clustered geographically? Local or geographic advantages can create more predictable demand for the firm, and may give it pricing power.
Have benefits of the learning curve made the firm more efficient over time? Companies that learn from their experiences, and become more efficient are likely to maintain their advantages over time.
Does the business require less invested capital than competitors do? This indicates how much the company needs to put back into the business, a low amount shows high level of moat.
Are there economies of scope? Does the company operate in different sectors? And does it benefit from that?
Does the company have a culture that creates employee surplus? Happy employees