A company that has developed defensible revenue streams will make you money. Even in market downturns or sales slumps, these companies can count on protected sources of income. When you combine this rare quality with strong growth prospects, you've got the potential for a killer investment.
Of course, not all moats are created equal. But here are a few names that have serious long-term potential.
Better than all the rest
CEO Satoru Iwata of video game developer Nintendo is a quintessential moat-builder. Most wouldn't classify Nintendo as a stock with a moat -- but examine the facts. In an industry saturated with big-name players such as Microsoft
Since the late 1970s, when Nintendo began its foray into the video game world, the company has been integrating innovative thinking into its systems, from Donkey Kong to the DS. The latest iteration we've come to know and love, the Wii, has smashed industry expectations on the strength of its novel motion-sensing controller. It's been selling more than twice as many units as the PS3, and thrashing sales of the Xbox 360 since December.
But for Nintendo, the Wii's not just about selling a more popular console. It's about doing things differently. Consider this quote from a recent Fortune interview with Iwata:
We are not competing against Sony or Microsoft. We are battling the indifference of people who have no interest in video games.
Nintendo could go after the same tried-and-true crowd of people who regularly buy consoles and games. But doing so would toss the companyinto the same pool with Sony and Softy. Both of those companies lose money on sales of their consoles -- unlike Nintendo, which makes about $50 on each Wii -- because margins are thinner and development costs skyrocket for each new system.
Innovation begets moats, which creates profit
Instead, Nintendo has innovatively approached the billions of people who have never played video games or just aren't interested. And it's tapping that market more cheaply than its rivals, using less powerful chips and more off-the-shelf components. This March, the company reported a 90% increase in sales over the year before, along with a 77% increase in net income. This huge jump mostly resulted from the amazing sales of the touch-sensitive, portable DS, and it doesn't really account for the great future of the Wii. Yet it still translated to a 50% return on the stock since December. Adding insult to injury, Nintendo has just pushed Sony out of 10th place on the list of Japan's most valuable companies.
Innovation and creativity like that shown by Nintendo creates a well-guarded moat. Sure, the gaming industry is highly competitive, and walls are generally thin, but Nintendo has made a concerted effort to go against that grain and challenge a whole different market. By the time Sony and Softy catch up, Nintendo will be focused on something new -- one step ahead.
Stocks that pack the same punch
Other companies do this, too. Take, for example, Adobe Systems
Another moat to admire encircles CheckFree
This moat is under construction
Finally, there's a moat emerging at online jewelry seller Blue Nile
Blue Nile is a recommendation of our Motley Fool Rule Breakers growth investing service, and though this particular pick is already beating the market, it's one that we'd like to hold for the long term. This Investing in companies like this one, which combines growth with protected sources of income, will offer superior returns ... like Nintendo's 17% annualized return for the past 10 years, versus an S&P gain of just 5%.
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Rule Breakers team member Nick Kapur owns no shares of any company mentioned. Nintendo is a Stock Advisor recommendation. Blue Nile is a Rule Breakers and Hidden Gems recommendation. Microsoft is an Inside Value pick. The Fool has a disclosure policy.