Today I will focus on a factor that should be taken into consideration when choosing a company. Today we will get into the technical aspects of the matter. What are the main factors that distinguish monopolistic companies from others? By what financial indicators can we distinguish these companies from others? By what differences in business style can such companies be found? Today, I will explain why their return on investment is higher in the long run and how we can find young companies that will turn into monopolies in the future. If you want to be a better investor, you should definitely not miss what I will tell you today.
The most important feature that distinguishes monopolistic companies from others is that they have a wide portfolio. The water around medieval castles is called moat. This makes it difficult for enemies to come to the castle. Besides, many soldiers did not know how to swim at that time. Also, sometimes crocodiles etc. can swim in it. Thus, it becomes difficult for the enemy to access the castle. It's just a thin bridge. They remove that bridge. In the Middle Ages, enemies could not reach it. Thus, the feudal states survive until Mehmet the Conqueror finds the technique to conquer Istanbul with heavy artillery, and then, as you know, this era ends with Mehmet the Conqueror.
The concept of moat is also valid in the business world. In the business world, in order for a company to protect itself against its competitors, it must have a moat or a moat, if you want to call it a competitive moat. The wider and deeper this moat is, the more dangerous entities swim in it, the more possible it is for the company to protect itself. If you have a wide, deep moat with dangerous creatures in it, this also offers you some monopolistic advantages. First of all, it becomes easier to beat your opponents. You can stay in the market longer. They just can't come to you. Secondly, valuation can also create a positive vicious circle. Because investors look at such companies and see that they can survive for a long time. Since the profit margins of these companies are relatively high, they can generate free cash flow. With these, they can go and buy back their own shares. This constantly reduces the stock in the market, increasing the company's profits. Thus, the valuation also increases.
They have the ability to keep their gross profits particularly high even during difficult periods. Being an investor in these companies during periods such as recession is very advantageous in this respect. On the other hand, they can sell premium priced products. In other words, the product is almost exactly the same as its competitor, but it can sell at a higher premium price. We will look at the reasons a little later, and they have the power to establish and even expand their market share without incurring unnecessary expenses, that is, without incurring excessive sales and marketing expenses, for example, or without giving excessive shares to dealers in the distribution channel. This is another great advantage of theirs, and on the other hand, of course, extremely stable profitability, cash flow and growth come with these types of companies. That's why investing here is very advantageous. To show how advantageous it is, I will give you examples from two different companies from two different sectors.
First is Apple. I will compare it with Apple's competitors, Dell and Samsung. Apple is in direct competition with Dell, especially on the personal computers side. On the other hand, it competes with Samsung with its mobile phones. But we will see in the presentation that Apple has a wide moat separating them from them. That's why their numbers are much better. First of all, when we look at the market value, Apple has a valuation of $2.63 trillion, whereas Dell has a valuation of only $85 billion and Samsung has a valuation of $402 billion. From here we already understand that the investor highly evaluates the fact that the company is a monopoly. The easiest way to understand whether it is a monopoly or not is to look at gross profit. Because your high profit margin means that you can sell your products at higher prices while being relatively less affected by competition.
When you compare Apple and Samsung, they do exactly the same work. In fact, many of Samsung's products may even be superior to Apple. But Apple's gross profit is 45%, Dell's is 23%, Samsung is 30%. In terms of EBIT margin, Apple is at 30%, Dell is at 6.6%, Samsung is only at 2.54%. Apple is at 33% in EBITDA, Dell is at 9.89%, Samsung is at 17%, and Apple is at 26% in net stability, meaning 26 dollars of every 100 dollars of turnover comes to Apple as net profit. At Dell it's just 3.63%. In Samsung it is 5.59%. When we say Samsung, we are of course talking about Samsung's electronics unit here. Besides mobile phones, there are also computers, televisions and other electronic products.
The rate of return on assets is higher in this type of companies. Apple's 29.53%, Dell 4.58%, Samsung unspecified. The rate of return on total invested capital is 42.38% in Apple, 14.06% in Dell, and only 1.11% in Samsung. When you look at it in terms of free cash flow, we see that Apple crushes its competitors quite a bit. When we look at the net profit per employee, the number is incredible: 626000 dollars for Apple, 26000 dollars for Dell, Samsung is not mentioned here.
Now let's look at another sector, again a very popular example is Nvidia. Let's compare Nvidia with its direct rival Intel. Let's also compare Nvidia with TSM, the world's most important microchip manufacturer. Nvidia and TSM are not rivals. TSM produces chips for Nvidia. But after all, it is the world's largest chip manufacturer. Nvidia is the world's largest chip company, valued at $2.2 trillion. Intel's value is only 189 billion dollars, and the value of TSM, which produces the world's most successful chips and has the largest factories, is 622 billion dollars. That is, almost 1/4 of Nvidia's. It really seems inconceivable.
How come it is worth 1/4 of the world's largest chip maker, Nvidia? Intel is almost 1/10 of Nvidia. Gross profit is 72% in Nvidia, 54.36% in TSM, 40% in Intel. Monopolistic power sign EBIT margin is 54%, it is almost non-existent in Intel, 42% in TSM. Nvidia is a little behind in EBITDA. Here, TSM is a little better, Intel is again at 1/3rd level. When we look at the net profit, Nvidia has 48%, Intel has 3.11%, TSM has 38.79% and these are annual figures, so if we looked at the last quarters, Nvidia would have become a much greater power. Return on assets is 54.89%, meaning half of the value of total assets returns to Nvidia as profit. 16% in TSM, not returning in Intel. So, if you are monopolistic, you outperform your competitors by a large margin.
So what are the monopolistic features of Nvidia and Apple? Now let's look at this within the framework of five criteria. The biggest competitive advantage, my number one item is intangible assets. What can happen here is innovation skills. If a company is able to innovate, it means that it constantly finds ways to keep its profit margin high. Because it can find new value-added products and services for its customers. Brand strength is very important. Apple has a brand value of $516 billion. I think this, in the simplest sense, is the asset value of the consumer's easy choice of your product. So, when you see an Apple product, you buy it more easily than your competitor. For example, brands such as Microsoft, Google and Amazon are very valuable here.
When we look at the automobile side, we see that Tesla is the second most valuable brand, with a value of 58 billion dollars. BMW has a valuation of 41, Porsche 43, Hyundai 37, Mercedes 59, Toyota 52, Mitsubishi 35 billion dollars. When we look at it from the perspective of brands, how is this evaluation done? Patents and intellectual property rights are a separate story. These can protect you against your opponent. Some licenses to be obtained from the state are very important, especially in airlines and banking. For example, Palantir has received a high-reliability company license in the United States from both the Pentagon and the CIA. This is very valuable. I think it is very important that knowhow is the ability to do something, it is far above the competitors, and the competitor cannot easily learn or imitate it.
Management quality; What is the quality of the company's managers, what is the company's strategy, how does it produce, is the company able to employ the most valuable people, and what is its skills, performance, and quality standards in terms of the standards that the company must comply with. In this context, let's compare the previous companies. Apple has Dell and Samsung among themselves, Nvidia has Intel and TSM among themselves. Apple's intangible assets are extensive. Since we are looking from this ditch here, I put scales such as wide, narrow and medium. First of all, the brand has a tremendous intangible asset, many patents, etc.
But I think the most important difference is the brand. The trust that that brand creates in the consumer. Dell is very narrow on this issue. When we were young it had a very wide moat, it narrowed down. Now, when you go to the market and buy a Microsoft-based computer, I don't even know what makes Dell different from others. Compared to Samsung and Apple, yes they have patents. It is a good technology company, but the value of the brand is not that high. That's why I rated it as average. When we go to the other side, when we compare Nvidia Intel and TSM, Nvidia's intangible assets are amazing. It has the best GPU in the world. It will have a better GPU next year. Apart from this, not only GPU, but also software, hardware and their integration with each other, there is a very serious intangible asset here and it has recently turned into a serious brand. Everyone in the world has learned about the Nvidia brand. Intel is a medium-sized company here, so we cannot say that it is a very unsuccessful company, but it is somewhere in the middle.
Of course, TSM intangible assets are not large on the brand side, but patents and production knowhow are very successful here. No other company can produce the microchips that TSM can produce. Our second criterion is economy of scale. I have mentioned this many times before. If a company has economies of scale, that is, if it has the power to produce, distribute and market products more economically than its competitors, this gives it a great advantage. First of all, it becomes more efficient because it learns more, thanks to the learning curve, that is, when it produces more. Such companies can produce at lower costs. Their purchasing and bargaining power is high. So scale comes in handy here.
Access to financial resources becomes easier. Because banks, financial institutions or investors give money to large companies more safely. Of course, these types of companies generally have lower credit costs. That's why they build a high minimum investment wall. As this investment wall rises, it becomes more difficult for competitors to enter the market. That's why it can hinder the competitors who reach that scale.
Of course, when the marketing power is many stores, for example when it advertises, the distribution of this advertisement and the cost per store decreases considerably. This is what I call marketing power.
Critical mass means that sometimes you have to exceed a certain mass in order to be profitable in a product. A certain number of customers and a certain volume provides this economy of scale. For example, in nuclear, there are currently some small nuclear power plant manufacturers. They cannot succeed. Because they don't seem to be able to reach that critical mass of those who operate giant nuclear power plants.
Along with artificial intelligence, another important criterion is the wealth of data the team has. Tesla, for example, has an advantage in this regard. It collects a lot of data from its cars. Thus, it is approaching autonomous driving. We will dwell on the importance of this a little more later. When we look at economies of scale, we can say that Apple has a lot of power here. Because the distribution channel is enormous, the brand is tremendous, access to customers is extremely easy, and dealership organizations are extremely strong. So it's very strong in that aspect. We can say that Dell has probably achieved moderate success here. Samsung has large scale.
In other words, it is already the second best-selling mobile phone in the world after Apple. We can say that they are competing with Apple in this respect. When we compare Nvidia with its competitors, Nvidia currently has a huge scale. The world's largest GPU brand. It reaches the most customers. All big companies work with it. TSM has a great economy of scale on the production side. None of its competitors can produce what it produces. It cannot produce at its costs. Intel seems to be stuck in the middle here again. Of course, this reflects negatively on its valuation.
Let's talk about the third monopolistic force: the network effect. You are a company like this; You have established a network between producers, intermediaries, users and customers. As the number of people participating in this network increases, the value that everyone receives from that network, whether producers, users or customers, also increases. So it becomes more useful to everyone. This is what we call the network effect. There is even a law for this. This is called Metcalfe's Law. Metcalfe's Law says that as the number of users on a network increases, the value of the network increases parabolically. On the other hand, the cost curve increases linearly. After a while, the gap becomes wider. This makes that network very valuable. I know you're a little confused about what I mean. It was a bit conceptual. Let's download a very simple example.
For example, compare WhatsApp with Telegram. All your friends left WhatsApp at one point and tried to go to Telegram because they got angry at WhatsApp. What happened? You came back to WhatsApp. Because everyone is here, and since everyone is here, it becomes possible to reach more people and do more things. Almost all social media platforms are like this. The benefit you get from a small social media platform is minimal. When you go to a big platform, you can market your products more easily. You can reach more people just by looking as a User. You can see other people's comments.
That's why this network power comes to the fore especially in social networks. When we look at it this way, Apple's network influence is wider than others. For example, more people use it. Just looking at the messaging application, more messages are sent among Apple users and it is important to be in that network. It is important to use applications that Apple is compatible with on the mobile phone side. Almost all application developers come here and upload their applications here first. Because there is a wider customer network here that they can reach from a single source. In this respect, we can say that Apple has a wide network. We can say that there is a network effect. There is no such effect on Dell.
Two Dell users do not have a special advantage for owning a Dell. So communication between a Dell user and an IBM Lenovo user flows the same way. We cannot say that there is a network here. Maybe Samsung has it in the mid-range. But it doesn't have a serious network power either. Nvidia has a very wide network power. Nvidia users, Nvidia experts, for example, find jobs easily. Nvidia doesn't just produce GPUs, it produces software.
However, Nvidia is also investing in companies that will work on chips, such as autonomous driving. It integrates those types of technologies into the work. It also produces robotic software and hardware. Thus, it creates a network with robotic companies. So Nvidia has a great network. In this context, TSM has a medium-sized network. So there is itself, it has its suppliers, and it also sells products to its competitors like Nvidia. There is no such thing as being included in the TSM network. Likewise, Intel does not have such a concept.
The fourth important value is abandonment and switching costs. This is also an interesting value. In my eyes, we are talking about the costs of leaving a brand and a company and going to another brand and another company. For example, if you use a bank and leave one bank and go to another bank, you have some risks. Maybe the other bank will not extend enough credit lines to you, for example. Conveniences are important here. You've gotten used to it, now you can use it very easily. For example, I can use Spotify very easily, but I can't use YouTube music that easily.
Exit may have some costs. As you know, you incur extra costs when unsubscribing from many memberships. There may be rebuilding costs. For example, you threw out a certain GPU brand from the world and brought a new one. You have to adapt the whole system to it. This may require reinstallation costs. There are learning costs, we got used to one of them, we learned all together. We don't know that new product, that new brand that well. The transition is growing before our eyes. There may be emotional costs. For example, I am known as an Apple user. I think there are elements of prestige to owning Apple. Switching to Samsung doesn't feel good for me emotionally, even if it has a much better product.
There may also be ecosystem costs. Apple has a very advantageous advantage in this regard. For example, as soon as I say I give up my mobile phone, my relationship with my tablet begins to break down. The data flow to my computer seems to be getting harder. Ecosystem costs are also very critical in this respect. When we look at it this way, I think Apple has a very, very broad power in this regard. I think Dell has narrow power and so does Samsung. So the cost of switching from a Samsung phone to a Xiaomi phone is almost zero. Because their software is the same, the screens are the same, the interfaces are the same, so they have a very low cost.
There is no special relationship between Samsung devices. So, when you have a Samsung computer, there is not much of an advantage of having a mobile phone. That's why those who use Android or Microsoft operating system do not have much of an advantage in this respect. Dell and Samsung are examples of this. In the fifth issue, cost advantages; The one producing the lower cost product wins the game. Because it can take a large market share by reducing profit margins. Part of this, of course, has to do with economies of scale. You may have access to some of the resources we have already mentioned or that are low cost. For example, it has a port, thus transportation costs have been reduced, or it has a precious metal. In this way, you can get certain raw materials cheaper. It is integrated, business processes are more efficient. He has better knowhow. Since the brand is very strong, you can enter it at a lower cost in a shopping mall you visit. Additionally, because it is strong, the company can hire the best employees for relatively low salaries. One of the best examples of this is audit companies. For example, they give very low salaries. But good employees can get jobs. At least it was like that in my time.
Because you have a chance to rise from there. Of course, some cost advantages are very important. When we look at it in this context, for example, I think Samsung is more advantageous than Apple, especially in terms of production costs. Perhaps Apple has an advantage in matters such as sales, marketing, and hiring the best employees. Dell goes somewhere in the middle or low here. I think Nvidia's cost advantages are again very broad. First of all, it does not have its own production. But he designs such magnificent products that he can have them produced by anyone he wants. Thus, it does not have to establish large production facilities. He doesn't have to deal with his efficiency issues. I think this is an advantage for Nvidia. Although TSM is more advantageous than rival companies, it operates at higher costs than Nvidia. We have already looked at its reflection on gross profit. In Intel, this range is quite narrow. That's why Intel's profits are much lower.
Thus, we have seen with examples the five basic features that make a company a monopoly. What we need to do now is how can we find these monopoly companies. Also, how do we discover companies that are not monopolies yet but may become monopolies in the future? Or, conversely, how do we look at companies that are monopolies today but have lost their monopolistic characteristics, such as Apple? We also need to learn them. How to find monopolistic companies. Frankly, it takes some effort. The most important thing is to study industry trends. So who is the most ambitious, newest player in that industry? What are the five factors that differentiate it from its competitors? What are the strengths and weaknesses in those factors? How is the quality of management? Does he just like to compete or is he looking for innovations that will break away from the competition?
When we look at it financially, how is the gross profitability trend going? If it goes down it's bad, if it goes up it's good. What is the investment return rate? If it's going down, it's bad, if it's going up, it's good. Can it grow quickly with low debt? Because if you have a competitive advantage, you can make money quickly with relatively low investment, that is, little debt, and there is stable earnings per share growth? Remember, the value of companies is ultimately based on earnings per share. It depends on how many times it is multiplied, so whether the profitability per share is high and whether it continues to rise are important criteria.
But here's the thing: In this part of the presentation, we have examined the current performance of the companies. So what will happen in the future? For example, the concern about Apple is that it is losing its competitive advantages. On the one hand, companies that produce much better mobile phones more economically are starting to step in. On the one hand, Apple customers may go to competitors because they no longer see anything new in artificial intelligence. New technologies are coming. So we can never rely on our monopoly power forever. On the other hand, in some companies, a monopolistic structure can form over time. On this subject, we will return to our beloved Tesla. It would be natural not to mention Tesla in a presentation I made.
Here I examine Tesla from five different perspectives. According to these perspectives, Tesla's competitive advantage lies in different situations. For example, if we look at it only as an automobile manufacturer, I think Tesla does not have serious competitive advantages. So maybe the brand is a power in intangible assets. He knows how to do certain things, but there's no real difference there. So, we should not compare a Mercedes with a Toyota. Scale network effect, abandonment, switching costs. So, in my opinion, switching from a Tesla car to a competitor car is very expensive, the abandonment cost is still low and the cost advantages are quite narrow. When we look at it as an electric car manufacturer, I think intangible assets are a little stronger here.
But the economies of scale are huge. Because there is no one other than Tesla who can produce electric cars and make a profit only from electric cars. So it's reached the right scale here. The network effect starts to increase a bit here. Because there is a charging ecosystem. This is the company with the largest charging ecosystem and it has advantages there. Don't give up or change, this is where it starts to get a little difficult. Because, for example, you came to your home and installed a Tesla charging unit. Now, when you give up on Tesla, it seems like you'll have to replace it too, and there are some cost advantages. Otherwise, it wouldn't be the only profitable electric car manufacturer. Here, it has an advantage in terms of both the scale it has reached, its know-how, and how it manages its production facilities.
But we can call the competitive advantages here medium, not wide. But let's look a little further now. If Tesla can achieve fully autonomous driving, things are starting to change here. Because it reaches a special know-how that no other competitor has, and this is a know-how that is very difficult to imitate. Because there are a lot of things, software, hardware, data. Here things become very difficult for competitors. Economies of scale are expanding a lot. Because here you have the chance to sell this as a service not only to your own cars but also to other brands. Here it can reach very large scales. Moreover, this company is now turning into a software company rather than just a physical production company.
It's easier for software companies to scale. Because you don't need to build a factory. Network influence is expanding. As the number of Tesla autonomous vehicles in a city increases, the quality of autonomous driving in that city also increases as the vehicles learn that city better. Abandonment costs become very difficult. Because there is no autonomous driving in any other brand. If you are used to it and love it, when you give up on this brand, you give up on autonomous driving. It becomes very difficult and there are a lot of cost advantages here. Because no competitor currently has an autonomous vehicle project that operates at this scale and at a low cost. As you know, Tesla only does this with cameras. In other brands, these works are carried out with lidar radars at much higher costs. Here Tesla's technology is distinctive.
If Tesla can take this one step further and establish a fleet of robot taxis, that is, if its own robotaxis and robot taxis can be driverless taxis, then things get even weirder. There is tremendous expansion in every aspect. If Optimus robot comes into play one day, it can provide great competitive advantages in all five of these criteria. That's why, when investing in a problem, we will look at the present, but we will also look at the future.
What we need to do here is to find companies with a future story like Tesla. Because this future story may not be reflected in today's value. When you choose Apple or Nvidia shares today, a significant part of these tremendous monopolistic forces are already reflected in the valuation. Since autonomous driving is not yet available in Tesla, this is not reflected much. But there are other companies where this reflection occurs much less. Because investors are not yet sure whether this monopolistic power will be formed or not. That's where the great opportunities for enrichment lie.
The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.
