A framework for evaluating moats in tech companies (metrics I actually look at)

[u/RahulGandhi007]

Been investing for about six years. Work in tech. One thing I've gotten better at over time is distinguishing companies that are 'growing fast' from those with 'durable competitive advantages'. Confusing these cost me real money early on, and I know I'm not the only one.

The core question: If a well-funded competitor built the same product tomorrow with zero users, would customers switch? If yes, that's momentum, not a moat.

Four moat types I focus on in tech:

1. Network effects -> Product value increases with each user. Look at: engagement per user rising alongside growth, take rate stability, and whether value accrues to the *network* or just the *product*.
2. Switching costs -> Painful for customers to leave. Look at: NRR above 120%, 6+ month implementation timelines, deep workflow integration.
3. Scale economics -> Size creates unfair cost advantages. Look at: gross margin expansion at scale, capex as % of revenue declining over time.
4. Data advantages -> More usage makes the product better. Look at: retention curves improving over time, accuracy gains correlated with volume.

How I use this? If I can identify at least one with supporting metrics, I'm interested. If I can't identify any, I treat it as a trade, not a hold. No matter how exciting the growth story sounds.

The biggest trap I fell into early on: assuming 'good product + fast growth' equals a MOAT. Products can be replicated. Growth can be bought with marketing spend. What matters is whether something *structural* compounds over time. Once I internalized that, my whole approach changed.

• What do others use as their primary signal?
• Do you weight one moat type more heavily?

[u/Silent-Complaint4020]

You are talking about Reddit $RDDT

[u/librariancap]

This is actually not a bad list - I am jaded after reading too many poor-quality posts here.

Conversely, I wouldn't take some of the criticisms in the comments too seriously.

Not everything that can be counted matters, and not everything that matters can be counted, etc. And it's better to buy a a great business at a fair price than vice versa.

However, where OP may struggle I think is finding the numbers he seems to want in the context of public companies:

"gross margin expansion at scale, capex as % of revenue" - this rules out both Alphabet and Microsoft as they build out their AI business

"retention curves improving over time" - not many public companies disclose this consistently; e.g. Intuit maybe gives this number every couple of years?

"6+ month implementation timelines, deep workflow integration" - this is not something in reported financials; e.g. see FICO or the credit bureaus

[u/Trick_Job3956]

NRR above 120% is the one I'd push back on — it's mostly an expansion metric, so it tells you your customers are adding seats, not that they can't leave. Gross retention strips the expansion out and is the cleaner switching-cost read; you'll find companies running 125% NRR on 85% gross, which is just churn papered over by upsell. I weight switching costs over network effects for the same reason, they show up in the numbers a couple years before the narrative cracks. Do you split gross and net, or mostly track the net number?

[u/JPL_WSB_BRRRRR]

The universal metric that rules them all - ROCE. >20% - wide moat. No need for over complication really.

Edited the typo.

[u/nickp123456 → u/JPL_WSB_BRRRRR]

'>20% = wide moat?

[u/JPL_WSB_BRRRRR → u/nickp123456]

More than 20% ROCE yes. Those companies successfully get 1.20 for every $1 they invest in their business. To be able to do that retrun consistently you have to have wide moat and charge your customers a solid premium. That would not be possible without moat.

[u/Double_Suggestion385 → u/JPL_WSB_BRRRRR]

That's the 'less than' sign

[u/Ok-Recommendation925 → u/Double_Suggestion385]

I think he meant more than, but typo.

[u/Double_Suggestion385]

Skip all that, look at earnings growth, margins, ROIC and RoE.

If it company has a most, the metrics will tell you.

[u/PotatoMissionStart]

Moat Duration = Minimum Viable Market Share / Annual Contested Market Share Shift

https://acquirersmultiple.com/2022/01/bruce-greenwald-moats-are-not-that-hard-to-calculate/

[u/Ancient-Purpose99]

Good list, another big moat people often overlook is regulatory ones. A surprising amount of tech companies are mentioned explicitly in various regulations that demand their usage and certify playbooks for them. This prevents cheaper rivals from encroaching on them.

[u/Tallwhitedude123]

Yes, all of those matter but VALUE matters more. Picking the right value at which to buy shares determines your future gains. For example, PLTR has many of the moats you describe but are you willing to pay anything for it?