Economic Moat Ratings: How to Measure a Company's Competitive Advantage

While businesses with sustainable competitive advantages are rare, history shows that some companies have been able to withstand the onslaught of competition—often becoming wealth-compounding machines.

The Morningstar Economic Moat Rating refers to how likely a company is to keep competitors at bay for an extended period. Morningstar has developed the concept into a comprehensive framework that can be applied consistently across a broad, global list of companies.

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A company with an economic moat has a structural competitive advantage that allows it to sustain economic profits over a long period of time. As a result, these companies are more likely to create value for themselves and their shareholders, which can lead to providing funds and portfolios that align with client needs.

The Morningstar Wide Moat Composite Index shows that wide-moat stocks returned 19.68% in 2025, beating the broader Morningstar US Market Index, which returned.Wide-moat stocks have also tended to see smaller price swings than no-moat stocks.

We look for five sources of structural competitive advantage when evaluating companies.

Unique features such as patents, brands, and regulatory licenses can prevent competitors from duplicating a company’s products or allow the company to charge higher prices.

For example, patents protect the excess returns of many pharmaceutical manufacturers, such as Novartis NVS. When patents expire, generic competition can quickly push drug prices down 80% or more.

If it’s too expensive to stop using a company’s products, customers are less likely to make the switch. But price isn’t the only determinant of switching costs—we also consider factors such as risk, hassle, and psychology.

Consider HR software provider like Workday WDAY. Every employee is trained on the software, and the client’s processes are integrated in this system, indicating that a switch would be time-consuming and costly.

This occurs when the value of a company’s service increases for consumers, suppliers, and developers as more people use the service.

The more consumers who use Visa V credit cards, for instance, the more attractive that payment network becomes for merchants, which makes it more attractive for consumers, and so on.

Firms that can provide goods or services at a lower cost can undercut their rivals on price or sell at the same price as rivals but achieve a fatter profit margin.

For example, as the largest restaurant brand in the world, McDonalds MCD can procure food and paper more cost effectively than its smaller peers. That’s an edge that we don’t expect to ease over the next few decades.

This dynamic typically applies to firms that service a market of limited size, in which potential competitors have little incentive to enter because doing so would lower the industry’s returns below the cost of capital.

Let’s take a railroad company like Union Pacific UNP. New entrants have little incentive to enter the railroad market because of the sizable upfront infrastructure costs. Plus, they run the risk of creating excess capacity with limited demand, giving Union Pacific the ability to maintain its size and position in the railroad industry.

Through fundamental research, Morningstar equity analysts determine if a company holds one or more competitive advantages and whether they will result in excess returns for an extended period.

Specifically, a committee of about 20 experienced analysts spanning sectors and geographies considers the five qualitative factors outlined above to assign ratings.

• Wide moat: A company with a strong defense against rivals that we expect to last 20 years or more.

• Narrow moat: A company that should maintain a competitive edge for at least 10 years.

• No moat: A company without any enduring competitive advantages. Just because a company boasts a well-known brand or has existed for a long time doesn’t mean it has an economic moat. Just because a company boasts a well-known brand or has existed for a long time doesn’t mean it has an economic moat.

Even the highest-quality company could turn out to be a value-destructive investment if it’s purchased at an excessive price. Morningstar subscribes to a long-term valuation-driven investment approach, which weighs a business’ intrinsic value relative to its market price. While price and value can become disconnected in the short term, they should converge over the long term.

Our economic moat analysis and fair value estimates are also inextricably linked. Economic profits should persist longer for companies with wide moats than those without, resulting in higher valuations.

At the heart of Morningstar’s valuation methodology is a detailed projection of a company’s future cash flows based on fundamental research by equity analysts. Morningstar believes that analyzing valuation through discounted cash flows is the best way to view cyclical companies, high-growth firms, or companies expected to generate negative earnings over the next few years.

The Morningstar discounted cash flow model expresses our long-term assessments of a firm’s competitive advantage and its impact on cash flows well into the future. It’s divided into three distinct stages:

• Explicit Forecasts: In this stage lasting five or 10 years, analysts make full financial statement forecasts, including items such as revenue, profit margins, and tax rates. Based on these projections, we calculate earnings before interest, after taxes, or EBI, and net new investment to derive our annual free cash flow forecast.

• Value of the moat: The second stage reflects how long economic profits should persist before a company’s returns on new invested capital, or RONIC, fall to its cost of capital. During this period that can last up to 15 years, we forecast cash flows using four assumptions: an average growth rate for EBI over the period, a normalized investment rate, average RONIC, and the number of years until perpetuity, when new invested capital no longer delivers economic profits.

• Perpetuity: Once a company’s marginal return on invested capital hits its cost of capital, we calculate a continuing value, using a standard perpetuity formula. At this stage, we assume that any growth or decline or investment in the business neither creates nor destroys value and that any new investment provides a return in line with estimated weighted average cost of capital.

During the second half of 2025, our robust review of the Morningstar stock universe resulted in 50 Morningstar moat rating changes. Financial services and industrials held stock moat upgrades, while downgrades were most concentrated in communications.

Artificial intelligence-related fears have fueled major selloffs, but AI is not a universal moat destroyer.

Payroll services, IT services, and enterprise software saw the most pressure. AI disruption tends to hit hardest when companies monetize human labor, monetize simple workflow automations, or have seat-based software licenses.

• Cloudflare Inc NET: Wide moat. The company earned an upgrade based on strong switching costs and network effects associated with its offerings and core business.
• Salesforce Inc CRM: Narrow moat. The company has the advantage of switching costs, with Agentforce as a defense against the emerging AI threat.

• Spotify SPOT: Narrow moat.
  Considering the company’s stature in the streaming music industry, we believe competitors will struggle to eat into Spotify’s leading market share.

• Sirius XM SIRI: No moat.
  The company’s in-vehicle experience can be mimicked by streaming providers that don’t need the satellite technology or customized radios.

Asset managers continue to face secular and cyclical headwinds. While most of the asset managers in our coverage have tried to offset pressures, primarily through acquisitions or diversified product offerings, many continue to struggle to differentiate themselves. Still, companies with a stable of cost-competitive funds and adaptable business models are more likely to be better positioned for success.

• LPL Financial LPLA: Wide moat.
  The independent broker/dealer has carved out a defensible edge around serving advisors well, a commitment to continuously investing behind its technology platform and breadth of services, and a wide range of affiliation options that allow LPL Financial to compete in any of the major advisory models.

• HSBC HSBC: Narrow moat.
  We believe the group's restructuring efforts are paying off, as improved organizational efficiency and exiting underperforming markets support a durable uplift in returns on tangible equity, or ROTE.

The past few years have been challenging for apparel firms. Considering the imposition of higher US tariffs, share prices were volatile in 2025. Although we think opportunities exist for long-term investors, short-term risks are high.

• Dick’s Sporting Goods DKS: Narrow moat.
  The retailer is a key destination for consumers and athletic apparel. Equipment vendors as consumers are drawn to its on-trend product assortment while vendors see Dick’s as a reliable partner for reaching and engaging with consumers.

• Gildan GIL: Narrow moat.
  Although it’s difficult to attain a cost-based edge in the apparel industry, we believe Gildan’s vertically integrated supply chain has allowed it to gain one in the production and distribution of t-shirts and fleece for the US printwear industry.

Despite depleted savings, the appetite for gaming remains strong—particularly in i-gaming wagering and sports betting. We expect this trend to continue with sports betting sales to reach over $30 billion by 2030, while i-gaming revenue is projected to expand to $26 billion.

• DraftKings DKNG: Narrow moat.
  We’re confident that neither competition nor regulatory forces will deter the company’s stout position within the US online gaming market.

• Komatsu 6301: Wide moat.
  Driven by its century-old global brand and lifecycle support—especially in mining where two-thirds of revenue stems from recurring aftermarket— Komatu’s innovation in autonomy, digital solutions, and tonnage-based service bundles should underpin its premium pricing and earnings resilience.

• Keyence 6861: Wide moat.
  The leading global provider of sensors, vision systems, and measurement equipment operates under a consultancy-like model—offering value-added solutions and institutionalized know-how, which supports its high margins.

• Siemens Energy ENR: Narrow moat.
  We project the company’s top line to grow through the next five years as secular trends boost its two largest businesses, increasing share of service in the gas services business and the turnaround of Siemens Gamesa.

• Thomas Reuters TRI: Narrow moat.
  In the long term, we cannot fully discount the possibility that AI-driven editorialization surpasses the current human-driven processes for Thomson’s legal and healthcare content databases.

• Sony Group SONY: Wide moat.
  Over the past decade, Sony has focused on content acquisition and developing recurring revenue businesses that enable long-term monetization from customers. We believe Sony Group’s current portfolio is much stronger than before.

• ASM International ASM and BE Semiconductor BESI: Wide moat.
  These are key players in atomic layer deposition and advanced packaging equipment, respectively. We expect those technologies will become increasingly important as the semiconductor roadmap evolves over the next decade, serving as enablers for advanced chips and supporting above-average growth.

• Proximus PROX: No moat.
  Many European telecom companies—including Proximus, T Group, Liberty Global, Swisscom, Tele2, and Telia—lack the scale and pricing of their international peers. In fact, broadband network overbuilding has become increasingly common along with redundant infrastructure and higher costs.

Many biotechnology firms enjoy economic moats. Strong innovation is countering headwinds from patent expirations, US drug pricing legislation, and pharmacy benefit managers negotiating leverage.

Here are some notable exceptions.

• Biogen BIIB: Narrow moat.
  Downgraded because of patent pressure and high-risk neurology programs.

• Grifols GRF: No moat.
  Downgraded because of increasing competition and poor economics around the firm's plasma business.

In general, medtech firms need intangible assets to get noticed by customers. However, switching costs typically determine the moat width.

• Water WAT: Wide moat.
  The company’s analytical instrument business, consisting of liquid chromatography, mass spectrometry, and thermal analysis tools, enjoys profitability near the top of the life science market.

• Baxter BAX: Narrow moat.
  Claiming top-tier positions in most of its product lines, Baxter typically competes with a concentrated group of peers. We see a relatively long runway for the company to generate economic profits with its existing technology and pipeline of new products.

• Kraft Heinz KHC: Narrow moat.
  Over the past five years, Kraft Heinz has pursued durable efficiencies, elevated brand spending, enhanced its capabilities, and leveraged its scale to respond more nimbly to changing market conditions.

• Uber UBER: Narrow moat.
  With autonomous vehicles (AVs, “robotaxis”) expected to play an increasingly impactful role in the rideshare industry, we believe that Uber is the only rideshare company with a vast network and critical mass—presenting a strong value proposition to potential AV partners.

• Lyft LYFT: No moat.
  Due to its poor core user base growth, lower engagement, and downward trend in incremental gross margins, Lyft lacks network effects. Its diminutive scale also creates a significantly reduced value proposition and reduces the likelihood of AV partnerships in the future.

• Zoetis ZTS: Wide moat.
  Since its spinout from Pfizer in 2013, Zoetis has launched a string of revolutionary blockbusters that have made it a leader in the higher-margin companion animal segment.

• Medline MDLN: Narrow moat.
  Prime vendor relationships provide a durable source of long-term revenue and opportunities to expand brand presence. Thanks to its vertically integrated operations, Medline can also expand into new areas while maintaining full control over its inventory and salesforce.

The chip shortage is finally behind the US auto industry. However, new challenges including affordability, interest rates, and potential tariffs remain key barriers to growth. But increasing leasing penetration—expected to exceed 30% by 2026—would offer lower monthly payment options, improving affordability.

• BMW BMW and Mercedes MBGAF: No moat.
  We believe that customers’ willingness to pay a premium for these brands will continue to decrease over time, especially given their vehicles don’t match the technology offerings of premium Chinese competitors.

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