Commanding the lion’s share of a market can be both a blessing and a curse for a company.
- Consistent earnings
- Ability to gradually increases prices
- Economies of scale (reduced cost per customer)
- Often pay reasonable dividends
- Sometimes regulatory or capital requirements make competition from smaller companies impossible
- Small players can undercut larger, slower moving companies
- Management complacency
- Limited growth opportunities
- Can overpay for acquisitions in the pursuit of growth
With this in mind, I believe there are a few companies listed on the ASX that have demonstrated their ability to maintain their existing monopoly and either consistently increase profits through innovative management or by expanding to other domains at reasonable prices.
ASX Ltd operates the main Australian market for the trading and listing of public companies. It has only one competitor, Chi-X, which is an alternative location for trading the top 200 ASX-listed stocks. This market accounts for around 5% of ASX’s revenue and Chi-X has managed to take around 14% of the market since it opened in late 2011. ASX owns a true monopoly through regulatory and infrastructure barriers to entry, and is expected to grow earnings by 10% in the next two financial years through the launch of new products and an improving IPO market.
SEEK will be well known to most Australians who have searched for a job within the last five years. It operates Australia’s number one job marketplace and commands 83% of time spent job searching online. SEEK’s skill has been maintaining its Australian monopoly while expanding aggressively into Asia through a range of well-priced acquisitions. These businesses recently drove a 38% increase in revenue, even though the Australian revenues were essentially flat. SEEK is an impressive business with a great management team and bright future.
Finally, Carsales.com is the SEEK of car sales, operating the dominant Australian car advertisement website, as well as owning a 22.9% stake in iCar Asia Ltd (ASX ICQ), which operates a number of leading Asian car websites. Much like SEEK, Carsales has maintained excellent operating margins and return on capital by capturing 80% of all time spent online searching for cars. Carsales.com’s dominant market share and positive relationship with advertisers and car dealers should see the company strongly grow earnings in the years to come.
Companies that command monopolies of their respective markets often make great investments over the long term. Investors who bought into the three companies above early have been rewarded with stellar share price gains. I believe they have bright futures too as they have proven their ability to continually grow earnings without growing domestic market share markedly.
5 stocks under $5
We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.
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*Extreme Opportunities returns as of June 5th 2020
Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned.
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