When people hold excessively optimistic expectations for these popular small-cap and growth stocks, the concept of “first-mover advantage” is often mentioned. It seems that these companies naturally possess a “first-mover advantage” before establishing a solid moat or accumulating a large base of loyal customers.
However, I would like to remind readers that before a company truly achieves overwhelming results, the “first-mover advantage” is merely a pseudo-concept, filled with wishful optimistic analysis rather than objective and calm judgment. Otherwise, readers might be blinded by the so-called “first-mover advantage,” just like I was. The following two stocks are examples of two other “pie in the sky” companies that I was once deceived by.
Beyond Meat ($Beyond Meat(BYND.US)$): Plant-based meat company
International market expansion: In 2020, Beyond Meat actively explored international markets, especially entering China, the world’s largest meat consumption market. The company’s layout in the mainland Chinese market was considered to have a first-mover advantage, coinciding with the budding development of the plant-based meat market.
Brand recognition: As the “first plant-based meat stock,” Beyond Meat’s brand first-mover advantage is widely recognized. In the plant-based meat race, the company’s brand awareness and market share lead other competitors.
Channel layout: Despite the impact of the COVID-19 pandemic in 2020, Beyond Meat still achieved revenue growth through international channels. The company’s early layout in retail and food service channels provided it with a competitive advantage.
Technological innovation: Beyond Meat continued to invest in R&D in 2020, planning to establish an R&D center in Shanghai. This innovative strategy helps to consolidate the company’s technological leadership.
Stock performance and current operations:
The IPO in 2019 was very strong, reaching a historical high of $234.9 in July. It closed at $125 in 2020, up 65.3% from the beginning of the year. It closed at $65.16 in 2021, down 47.9% for the year. It closed at $12.3 in 2022, down 81.1% for the year. It closed at $8.9 in 2023, down 27.7% for the year. As of July 11, 2024, Beyond Meat’s stock price was $6.84.
Current operations: The company has been under pressure to make a profit and has been operating at a loss since 2019. The net loss in 2023 expanded to $338 million, with a net profit margin of -98.48%. The poor taste leading to weak demand for plant-based meat is one of the main challenges faced by Beyond Meat. Revenue decreased by 9.9% in 2022 and by 18% in 2023.
Root Insurance ($Root Inc(ROOT.US)$): The “innovative” car insurance company that “disrupted” the traditional car insurance industry
Driving behavior-based pricing model: Root Insurance broke the traditional car insurance pricing model through its unique “test drive” feature and telematics technology. Root’s policy prices are mainly based on the customer’s driving behavior, which allows them to provide safer drivers with lower and fairer premiums. This innovative pricing model not only attracts a large number of customers but also gives Root a clear technological advantage in the market.
Mobile-first customer experience: All of Root’s operations can be completed through its mobile app, including getting quotes, purchasing policies, managing policies, and submitting claims. This paperless, simplified process provides a high-quality customer experience, making insurance purchase and management more convenient.
Data-driven risk assessment: Root uses machine learning and data analysis to optimize its pricing models and risk assessments. This not only improves the accuracy of pricing but also reduces the occurrence of fraud. In addition, Root’s automated processes make claim processing faster, usually completed within 5 days, while the industry average is 12 days.
Revenue growth: From the data, Root’s revenue growth trend is very optimistic. The company’s total revenue grew from $43.3 million in 2018 to $347 million in 2020, a sevenfold increase. This rapid growth shows the market’s recognition and acceptance of Root’s innovative model.
Stock performance and current operations:
Root went public on NASDAQ in October 2020, and its stock price showed a typical “high open and low walk” pattern. It was sought after in the early stages of listing but then experienced a long-term decline. From the high point in November 2020 to the low point in March 2023, it fell by more than 85%. There has been a rebound since 2023, but it is still far below the IPO price.
Although Root’s net loss has narrowed year by year since 2021, it has not yet made a profit, with a net profit margin of -32.4% in 2023.
It is clear that although the above two companies were the first to explore the market in new segments or tracks, this does not mean that they have a real “first-mover advantage.” Just like Liu Bei in the early Three Kingdoms period, he first occupied Xuzhou but ultimately failed to hold it.
In my view, to determine whether a company has a “first-mover advantage,” the key is whether it has a dominant market position and whether its main customer base will easily turn to competitors when they appear.
If the customer base is enterprises, then whether the company’s products are deeply integrated with the customer’s data or products, making it costly for customers to turn to competitors. For example:
- Integrated circuit design company: $Cadence Design Systems(CDNS.US)$ and $Synopsys(SNPS.US)$
- Semiconductor manufacturing company: $Taiwan Semiconductor Manufacturing Company(TSM.US)$
- Automatic data processing company: $Automatic Data Processing(ADP.US)$ – providing payroll services, human resource management, benefits management, etc.
- Minimally invasive surgical robot company: $Intuitive Surgical(ISRG.US)$
If the customer base is individual consumers, then whether the company’s products are:
- Irreplaceable: such as the luxury goods company Hermès (not listed), $LVMH Moet Hennessy Louis Vuitton(LVMUY.US)$
- Product stickiness: such as Apple ($Apple(AAPL.US)$)
- Low-price marketplace: such as Costco ($Costco(COST.US)$)
- Many stores and deeply rooted: such as McDonald’s ($McDonald’s(MCD.US)$) and Starbucks ($Starbucks(SBUX.US)$)
In summary, “first-mover advantage” is not just about being the first to enter; it also requires consolidating market position through advantages in technology, brand, channels, innovation, and customer stickiness, truly do not be easily replaced in the competition.
However, when people excessively pursue the “first-mover advantage” of small-cap and growth stocks, they often overlook the real first-mover advantages of many large-cap and high-quality stocks, and are even too pessimistic about their performance.
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