At Urbem, we actively track the market share of the businesses that we invested in or are interested in. Specifically, we would pay more attention to the movement of this figure than the absolute value itself or the gap with peers.
A consistent increase in market share can tell us a lot about the competitiveness of the company’s products or services are competing favorably. Evidently, such businesses tend to take more advantage of economies of scale and market power as they grow. Meanwhile, the ability to gain market share also signifies the superior quality of the management. All these factors can contribute to a high and improving return on capital even for companies that are not the market leaders (yet).
Unavoidably, an eventual top-notch market share will attract attention from regulators and competitors. This is why we usually hope for the business to achieve its market penetration through continuous innovation, differentiated offerings, customer-tailored value propositions, high customer loyalty and low-cost production instead of high barrier of entry, patent protection or the control of distribution.
Below, we would like to share two stories of market-share gainers from our investable universe. It is worth noting that neither of them is the market leader in the respective space.
Softcat is a UK-based reseller of a comprehensive range of infrastructure technology solutions. The company differs from its peers with respect to its focus only on the high value-add niches (e.g., cloud computing, data management, cybersecurity).
The megatrend of digitalization is providing a strong tailwind for the IT infrastructure and services industry. Among major names within that space, Softcat appears to have been the fastest grower, gaining market share up from less than 3% to nearly 7% over the past decade, taking space from both the leading and smaller players like Computacenter (LSE:CCC, Financial) and CDW. For the last five years, the company grew its operating income annually by 19% while improving its return on invested capital from below 40% to more than 60%. The management attributed the success to the unique culture of the team as well as excellent customer service.
Connecticut-based FactSet Research Systems provides financial information and analytic software for investment professionals, including analysts, portfolio managers and investment bankers, at financial institutions worldwide. Although giants Bloomberg and Refinitiv together have been controlling more than half of the financial data market, FactSet finds its way to steadily win market share over time. The business almost doubled its market share over the last decade from 2.5% to nearly 5%.
The secret sauce lies in the company’s simpler, high-quality offerings with excellent client services at relatively lower costs. For example, FactSet is roughly half the price of Bloomberg. Take a glance at the company’s remarkable track record of increasing revenue and operating income every year while maintaining the return on invested capital above 20% for the last decade.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Softcat.
Read more here:
- A Total Return Analysis on FactSet
- A Total Return Analysis on Team17
- Thinking About Asset-Rich, Capital-Intensive Businesses to Hedge Inflation? Think Again
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