Tesla's (NASDAQ: TSLA) quarterly earnings calls break the mold -- they're actually interesting to listen to. The first quarter of 2018 didn't disappoint as CEO Elon Musk talked about an unwieldy machine on the production line dubbed "fluffer bot," used words like cockamamie, and created controversy by dismissing Wall Street analysts and turning Q&A over to YouTube channel operator Galileo Russell.
One of the more interesting moments from the call came when Russell asked Musk why Tesla's charging station infrastructure isn't being used as a moat against other automakers. Musk's reply:
Musk's comment, while seeming flippant, holds a valuable lesson for investors.
What's a moat?
Just as a moat offered a city protection in times past, an "economic moat" refers to a competitive advantage a business has over its peers. Things like low-cost products or services, convenience of use, or brand recognition can create a protective moat for a company. Some classic but no longer as relevant examples are Walmart (NYSE: WMT), Coca Cola (NYSE: KO), and IBM (NYSE: IBM).
Times change, though, and moats lose their effectiveness (ask the above-listed companies). It might be shifting consumer trends, changing economic conditions, or competitors finding another way into the castle. Musk is alluding to that last point. Boiled down, the argument is that, in today's business environment and that of the foreseeable future, the best defense is a great offense. Companies focused on maintaining what they already have will be quickly overrun by competitors, but the company that can innovate faster than all the others won't need a moat at all.
Warren Buffett, the man who popularized and has profited from moats, took exception to the comment. Buffett adduced some of Berkshire Hathaway's (NYSE: BRK-A)(NYSE: BRK-B) subsidiaries like insurance company GEICO and See's Candies.
Not to be outdone, Musk said he will be starting a candy company.
Time to reinvent the moat?
All humor aside (though Musk said he was serious about the candy venture), this is an important consideration for investors. There are plenty of companies with moats, and investors can profit from owning such stocks. However, this is nothing to hang one's hat on. The pace of technological innovation and changing consumer activity has created an environment where disruption is a powerful force. Case in point, here were the top-10 companies in the S&P 500 index a decade ago compared with today.
This list changes year to year, nor does it show the whole picture. There are hundreds of other companies that were a fraction of their current size, or didn't exist at all, a decade ago that are now on everyone's radar -- including Tesla. It nevertheless illustrates this point: Innovation has become the most powerful business tool to achieve growth and stave off competitors. That's why the companies that currently sit at the top of this list continue to be known as innovators looking for the next big thing in the world of business.
That doesn't mean moats are dead; they're not "lame," either. Rather, it's time for investors to rethink what a defensible position is. It's all about innovating before an upstart competitor does it first.
10 stocks we like better than Berkshire Hathaway (B shares)When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Berkshire Hathaway (B shares) wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of May 8, 2018
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Nicholas Rossolillo and his clients own shares of Alphabet (A shares), Alphabet (C shares), Apple, Berkshire Hathaway (B shares), Facebook, Johnson & Johnson, Chevron, Pfizer, Coca Cola, JPMorgan Chase, and Microsoft. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Berkshire Hathaway (B shares), Facebook, Johnson & Johnson, and Tesla. The Motley Fool is short shares of IBM and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and short May 2018 $140 calls on Johnson & Johnson. The Motley Fool has a disclosure policy.