In every industry, there’s a leader — the company that sets the pace.
As an investor, identifying these industry titans can be invaluable.
Some companies dominate their market, boasting substantial revenue or profit share.
Yet, in other industries, leadership can be a fluid concept, changing hands as the business environment shifts.
Either way, studying the strategies, innovations, and market positioning of industry leaders can provide valuable insights for investors.
There can be only one winner
In some industries, sheer size can be a formidable competitive advantage.
Take Taiwan Semiconductor Manufacturing Company (NYSE: TSM), the world’s largest semiconductor chip manufacturer.
As the market leader, TSMC earns far more revenue than its competitors and thus, has the financial muscle to reinvest heavily into the latest cutting-edge technology.
Here’s some figures for context: in 2023, the Taiwanese firm generated over US$40 billion in operating cash flow and poured nearly US$31 billion into capital expenditure, a level of spending that few competitors, if any, can match.
TSMC’s aggressive investment strategy has solidified its dominance in the semiconductor market, producing around 90% of the world’s most advanced chips.
This market leadership translates into increased orders, more revenue, and thus, the ability to reinvest further, creating a powerful virtuous cycle.
In turn, TSMC shareholders have reaped the rewards, with a staggering 672 per cent increase in share price over the past 10 years.
In contrast, competitors such as Intel (NYSE: INTC) have struggled to keep pace with TSMC’s spending.
Here are some figures for comparison: the US firm generated US$11.5 billion in operating cash flow for 2023, less than 29 per cent of TSMC’s cash flow over the same period.
This smaller cash flow has forced Intel to rely on debt to invest in new technology, an unsustainable strategy in the long run.
The lesson here?
Studying TSMC helps you pinpoint the key factors behind its competitive advantage, and provides you with a business blueprint for assessing potential threats to its market position.
There can be more than one winner
Being the market leader does not mean it’s always winner-takes-all.
In many industries, there is room for more than one winner.
Take the payments network pair of Visa (NYSE: V) and Mastercard (NYSE: MA).
If you go by numbers alone, Visa has a far larger network compared to Mastercard.
Consider these three metrics for comparison.
As of 30 March 2024, Visa’s network hosted 4.5 billion cards worldwide, including credit cards and debit cards. In contrast, Mastercard had around 3.4 billion cards in circulation, more than a billion cards less compared to its peer.
In addition, Visa cards can be used at over 130 million merchant locations, enabling the company to process an astounding US$15.5 trillion per year.
Mastercard, on the other hand, is accepted in more than 110 million merchant locations, handling over US$9 trillion in gross payments volume in 2023.
By all accounts, Visa holds a network size advantage over Mastercard.
Yet, both companies are processing volumes running into the trillions, rendering the comparison to be a moot point. Indeed, it is possible for two companies to thrive alongside each other even when they both offer the same service.
It’s especially true when the addressable market is far larger than the two companies combined.
Visa estimates its addressable market for payment flows to be worth US$200 trillion, almost 13 times its current processing volume.
With such a massive market, there is ample room for multiple companies to succeed.
And thrive, they have.
Over the past decade, Visa and Mastercard have both done well for shareholders. Visa’s share price increased by 427 per cent while Mastercard’s has risen by almost 550 per cent.
A front row seat to innovation
Market leaders often lack clear benchmarks to follow because they are the ones setting the standards for the rest of the industry. As the top dog, they are breaking new ground, forging new paths, and in turn, setting the bar for others to follow.
Take NVIDIA (NASDAQ: NVDA), a company standing at the epicentre of the generative AI (GenAI) boom.
The firm’s meteoric ascent is largely attributed to its graphics processing units (GPUs), a technology developed in 1999.
Today, NVIDIA’s GPUs have become indispensable for deep learning, an advanced AI technique that leverages the GPU’s parallel processing to train AI models with vast datasets.
This capability has made GPUs a cornerstone of the GenAI landscape.
While NVIDIA’s current success may seem recent, it’s the culmination of years of innovation and strategic investment.
To get a sense of its immense work, here’s a brief rundown of the key milestones over the past two decades.
In 2006, the company’s introduction of CUDA, a platform that made GPUs programmable, marked a pivotal moment.
CUDA’s widespread adoption, with over 4.7 million developers using it in 2023, underscores its transformative impact.
To enhance GPU connectivity, Nvidia launched NVLink in 2014. The latest iteration, NVLink-5, as part of the Blackwell platform, supports a sizable 576 GPUs.
Then, in 2019, Nvidia acquired Mellanox for US$6.9 billion.
The transaction brought InfiniBand on board, an architecture designed to support data flow between processors and I/O (input/output) devices, making Infiniband an industry standard for high-performance computing.
Three years later, in 2022, Nvidia took another step by introducing its first ARM-based data centre central processing unit (CPU), the Nvidia Grace CPU Superchip.
The Grace CPU consists of two CPU chips connected by NVLink for high-speed, low-latency (read: low processing delays), chip-to-chip interconnect.
Before you get lost in the technical jargon, remember this point.
NVIDIA’s success was years in the making.
Investors who have been following NVIDIA for years, or even decades, had a front-row seat to the new innovations which the company brought to the table.
In turn, you also will get a sense of where the industry is headed.
As the saying goes, the best way to predict the future is to invent it. Following the leaders will grant you that unique insight.
Get Smart: Winners lead to more winning
There’s no guaranteed formula for success in investing.
Even the most successful companies can face setbacks or even lose their dominant position.
Here’s what you may miss: even if a market leader falls by the wayside, studying their rise and fall can provide valuable lessons.
By understanding how the challengers overcame the incumbents, you gain insight into the kind of competitive advantages that can be upended and in turn, uncover the durable advantages which stand the test of time.
Either way, the lessons learnt will benefit you as an investor in the future — and it all starts by aiming for the top dogs of the industries.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: Chin Hui Leong owns shares of Visa and Mastercard.