The Moat Just Gets Widened When A Brand Becomes A Verb

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Includes: AAPL, ADBE, CLX, FB, GOOG, GOOGL, GXC, MSFT, SPY, TCEHY, TCTZF, VZ
by: Steven Chen
Summary

It could be an extremely rare case for a brand to "verb up."

However, such a rare case could signal a widening moat and a long runway of growth ahead at the business.

I list 4 successful businesses who own and benefit from their verbified brands/products.

Source: Wikipedia.

Background

There is no greater recognition for a brand than getting "verbified." But getting there is by no means easy. Remember the search engine war between Microsoft (MSFT) and Google (GOOG) (GOOGL)? When explaining why the name "Bing" to the New York Times in 2009, Steve Ballmer, the CEO then at Microsoft, told that it has the potential "to verb up." For example, in the future, people would "bing" a restaurant to find its address or "bing" a movie to find its trailers and reviews, hopefully!

Fast forward to today (after 10 years), we still Google but we do not Bing (at least not yet). Google's dominance in the search market seems just unshakable. As Peter Thiel said in 2014:

Consider the fact that the word Google is now an official entry in the Oxford English Dictionary - as a verb. Don't hold your breath waiting for that to happen to Bing."

Brand Verbification

When a brand becomes a verb, it translates directly to what the brand does, establish a role in our lives and become an extension of our memory.

A verbified brand also signals a scale advantage. You would need to have a lot of people commonly using the product or service to have it enter pop-culture. This means brands must achieve a critical mass of users before there's an opportunity to become a verb.

Moreover, as it is difficult for brands to become verbs, the few that do create immense brand equity, and hence, a substantial barrier to entry.

Google's verb status has been providing the business with a wide economic moat against competitors, including Bing which was not even close in terms of getting verbified after a 10-year effort.

Apparently, marketers tend to believe in the power of verbification as it demonstrates a personal connection between consumer and brand. It is worth noting, however, that there are opposing sides about whether verbifying a brand or product is a good thing or not. For example, intellectual property attorneys usually contend that using a product or brand name this way risks losing the legal power of a trademark.

Investment Thesis

When it comes to investing, I believe that the verb status of a brand offers several sustainable competitive edges (e.g., brand power, scale, the barrier of entry, as described above, and therefore, delivers more business value than the loss (of legal power)).

In the dog-eat-dog capitalist world, an economic moat is crucial for long-term buy-and-hold investors to generate consistent alpha returns (if stocks were bought at reasonable prices) and reduce downside business risk from competitions. Therefore, businesses with their brands/products verbified deserve some top seats on investors' close watch list so as to be bought when the valuation is right.

Below is a list of some examples of businesses with successes in verbification of their brands/products. They all have wide economic moats reflected by their historical stock and business performances, in my opinion.

Google

You don't just search the internet, you google it."

For long, Google has been one of the most popular verbified brands in our daily lives. Thanks to the superior quality of the product, the search engine generally does what it actually means by "Google" - not so much the case with Bing or Yahoo (VZ), unfortunately.

Over the past decade, the stock went up more than 4x, significantly beating the S&P 500 (SPY).

Source: Yahoo Finance; data as of 8/5/2019.

The annual return on tangible assets has been stable mostly between 15% and 20%, except for 2018 when the one-time impact of tax reform kicked in. Consistently, high return on capital is a strong indicator of the sustainable competitive advantage (see A Quantitative Approach To Finding Wide-Moat Stocks).

Source: GuruFocus; data as of 8/5/2019.

WeChat/WeiXin

I'll WeChat (WeiXin) you," instead of messaging you on WeChat.

WeChat, the messaging and social media tool owned by Tencent (OTCPK:TCEHY) (OTCPK:TCTZF), is being used by almost anyone every day here in China. It is one of the very few Internet brands successfully verbified in the country. It appears relatively difficult for brands to get verbified in the Chinese language (compared with the English world - think about Apple's (AAPL) FaceTime, Microsoft's Skype, and Facebook (FB)).

The share of Tencent went up 10x for the past decade compared with only a 38% gain of the SPDR S&P China ETF (GXC).

Source: Finance Yahoo; data as of 8/5/2019.

Today, WeChat is not only a mobile app for communicating and socializing online but also the one-stop ecosystem, being part of our everyday life - from cab-hailing to food delivery, from wealth management to paying utility bills.

Source: Chinachannel.co.

Although the return on tangible assets has been trending down over the past few years, it has been always maintained at above 10% (see below), implying some resilience in the face of fierce competition. It is worth noting that WeChat does not generate the main revenue for Tencent, but the platform is the important leverage that indirectly contributes to the value creation across multiple business segments, including advertising, other business services, FinTech, gaming, and even the company's VC arm.

Source: GuruFocus; data as of 8/5/2019.

Photoshop

That picture was definitely Photoshopped."

Adobe (ADBE) Photoshop benefited from the first-entry advantage, which turned out to be the last-entry: it was one of the first digital photo editing software tools in 1990. Other photo editing software created later were judged against Photoshop, which helped spread word-of-mouth recognition further and enhanced the brand/product equity.

It is worth mentioning that other Adobe software was designed to seamlessly integrate with Photoshop, adding to the switching cost of the products' end-users.

Source: Medium.com.

The share of Adobe delivered a total return of almost 1,400% for the past decade or so, according to Morningstar's chart below.

Source: Morningstar; data as of 8/5/2019.

The return on tangible assets at the company seems a bit volatile year over year but was mostly maintained at between 10% and 30%, except for 2014 and 2015.

Source: GuruFocus; data as of 8/5/2019.

Clorox

I am going to Clorox the Oval Office."

Clorox (CLX) is probably the youngest verbified brand, as Kirsten Gillibrand said on stage at the Democratic presidential primary debate last week that she would clean the Oval Office with Clorox if she got to the White House, quickly sparking reaction on social media.

The verb status of Clorox is not fully established among the public, but I see the good candidacy here due to the brand's No. 1 market position in the many cleaning categories. As a matter of fact, the company owns quite a few leading brands (i.e., No. 1 or No. 2 share brands, as listed below), in addition to Clorox.

Source: Investor Presentation, Feb. 2019.

Although only matching the S&P 500 in terms of the total return for the past decade, the stock did outperform its peers by a wide margin (see below).

Source: Morningstar; data as of 8/5/2019.

The branding power at Clorox helps the company achieve consistently superior returns on tangible assets (always above 20%) for more than a decade (see below), weathering challenges from the global recession, digital transformation, shifting consumer preferences, and so forth.

Source: GuruFocus; data as of 8/5/2019.

Summary

To conclude, I would like to echo what was mentioned at the start - it would be extremely rare cases that brands are able to verb up despite companies' efforts. Remember, just several years ago when Yahoo asked people "Do you Yahoo?" or the 1970s (if you are old enough) when Kroger featured a jingle that sang out "Let's go Krogering, Krogering, Krogering …"? Today, you do not hear either saying anymore. On the contrary, in the rare case that a brand becomes a verb, we, as investors, just know that the economic moat gets widened for the business.

What is your favorite verbified brand? Feel free to comment below.

Disclosure: I am/we are long TCEHY, CLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mentioning of any stock in the article does not constitute investment recommendations. Investors should always conduct careful analysis themselves and/or consult with their investment advisors before acting in the stock market.