Investors love growth. As investors we purchase a company because we believe the future results will be strong. The logic is that as the company does better the share price will increase. All things being equal this is true. There are two challenges that growth investors face. And they are both related.

The first challenge is that price matters. I would rather eat at a 3 Michelin starred restaurant than Hungry Jacks. The problem is that there is a substantial price difference between the two meals. I must make a judgement call if the difference in price is justified given the difference in the culinary experiences. The same is true with shares. Any investor would rather own a faster growing company than a slower growing company. The judgement call in investing is if the difference in expected growth rates is justified by the difference in valuation.

The second challenge is that the projected growth is happening in an uncertain future. Just because a single investor - or even most investors - think an industry or a company will grow doesn’t mean it will happen. The expectations for future growth are reflected in the high valuation. The higher the expectations, the higher the valuation. I have written about why high growth may lead to poor outcomes.

Ideally a share would be purchased before high expectations became widely shared. Being early to the party can lead to high returns. The danger is that at some point expectations can cross the line between a realistic view of the future and a hype driven collective delusion. Being late to the party can lead to big losses.

The S&P 500 Growth Index uses three criteria to identify shares from the S&P 500 for inclusion. The shares with the highest ranking based on growth of earnings, growth of sales and 12-month percent price increases make the cut. All the criteria are based on historic results. This does not mean that the growth – let along price increases – will continue in the future.

In that spirit the following three US shares from the S&P 500 Growth Index are undervalued based on our analyst’s estimate of their fair value. They also all have a wide or narrow moat rating indicating our analyst’s belief they can sustain a competitive advantage for more than 20 or 10 years respectively.

Read more about how to find companies with sustainable competitive advantages or moats.

Nike (NYSE: NKE)

  • Fair value estimate: $129
  • Morningstar Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium

Nike is the largest athletic footwear and apparel brand in the world. Key categories include basketball, running, and football (soccer). Footwear generates about two thirds of its sales. Its brands include Nike, Jordan, and Converse (casual footwear). Nike sells products worldwide through company-owned stores, franchised stores, and third-party retailers. The firm also operates e-commerce platforms in more than 40 countries. Nearly all its production is outsourced to contract manufacturers in more than 30 countries. Nike was founded in 1964 and is based in Beaverton, Oregon.

Business strategy

We view Nike as the leader of the athletic apparel market and believe it will overcome current challenges, such as soft demand for sportswear in key markets. Our wide moat rating is based on its intangible brand asset, as we believe it will maintain premium pricing and generate economic profits for at least 20 years. Nike, the largest athletic footwear brand in all major categories and in all major markets, dominates categories like running and basketball with popular shoe styles. While it does face significant competition, we believe it has proven over a long period that it can maintain share and pricing.

We think Nike’s strategies allow it to maintain its leadership position. Over the past few years, it has invested in its direct-to-consumer network while cutting many wholesale accounts. In North America and elsewhere, the firm has reduced its exposure to undifferentiated retailers while increasing its connections with a small number of retailers that bring the Nike brand closer to consumers, carry a full range of products, and allow it to control the brand message. Nike’s consumer plan is led by its Triple Double strategy to double innovation, speed, and direct connections to consumers. The plan includes cutting product creation times in half, increasing membership in Nike’s mobile apps, and improving the selection of key franchises while reducing its styles by 25%.

Although its recovery in China has been slow due to economic conditions, native competition, and a political controversy, we still believe Nike has a great opportunity for revenue growth there and in other emerging markets. The firm experienced double-digit annual sales growth in six of the past eight years in greater China and, fueled by high government investment in athletics, we think it will do so again after the current difficulties have passed. Moreover, with worldwide distribution and huge e-commerce platform that brought $12.6 billion in Nike brand digital sales in fiscal 2023, the firm should benefit as more people in China, Latin America, and other developing regions move into the middle class and gain broadband access.

Moat Rating

We assign a wide moat rating to Nike based on its intangible brand asset. Nike is the largest athletic apparel company in the world, with $51.2 billion in revenue in its last fiscal year. Its revenue has increased in 12 of the past 13 years, with the pandemic-affected fiscal 2020 as the sole exception. Nike produces apparel and footwear for professional and amateur athletes, sports equipment, and sports-inspired fashion for both athletes and nonathletes alike.

As evidence of its competitive edge, the firm’s adjusted returns on invested capital, including goodwill, have averaged 38% over the past five fiscal years. We forecast that the company’s average annual adjusted return on invested capital (“ROIC”), including goodwill, will exceed its weighted average cost of capital over the next 20 years, as required for our wide moat rating. We estimate Nike’s weighted average cost of capital at 8.6% and expect its annual adjusted ROICs, including goodwill, to average 40% over the next decade. We believe Nike has been the preferred sportswear brand in the world since the 1980s and that it will remain so.

Nike achieves premium pricing on many products, supporting our view of its brand power. Its performance athletic shoes are the most expensive on the market. At footlocker.com, for example, Nike produces most of the styles of men’s basketball shoes that cost $170 or more per pair (as of March 2024). Some fashionable Nike shoes retail for prices associated with luxury footwear brands. For example, resale site Stockx lists dozens of styles of Nike sneakers that regularly sell for more than $1,000 per pair.

We believe Nike’s wide moat is supported by its worldwide reach. The company ships products to more than 190 countries, operates more than 1,000 stores (two thirds outside of the U.S.), and has another 6,000 or so branded stores that are operated by franchisees (primarily in greater China). Nike's annual revenue is more than double that of the world's second-largest sportswear firm, narrow-moat Adidas.

Nike produced $33.1 billion in fiscal 2023 footwear sales, more than the combined footwear sales of peers Adidas, no-moat Puma, and no-moat Under Armour. It has market-leading share in footwear in all markets and major categories and ships more than 800 million pairs of shoes per year. It is also the leader in athletic apparel, producing $13.8 billion in apparel sales in fiscal 2023. Although Nike is an American brand, 56% of fiscal 2023 sales of the brand came from outside of North America. We believe that no athletic apparel company will be able to approach its global market share in at least the next 20 years, supporting our view that it has a wide moat.

We anticipate that Nike will hold its position in North America despite increasing competition. We forecast Nike will produce 2.4% compound annual average sales growth in the region over the next decade. North America is Nike’s most important market, as it produced 44% of fiscal 2023 brand sales. It is also the largest market for the industry, as Euromonitor estimates the retail value of the U.S. sportswear market was $150 billion in 2023, more than double the size of the second-largest market (China).

While the North American sportswear market is highly competitive, we believe Nike can hold its market position due to innovation, sponsorships, and the enduring popularity of its brands. It is, in fact, the provider of the on-field uniforms of the three largest sports leagues in the US. Nike, which had already sponsored the NFL and the NBA, was awarded a 10-year contract (at a reported cost of about $100 million per year) to be the official uniform supplier of Major League Baseball beginning in 2020. Nike took this deal after Under Armour, which had originally won it in 2016, decided to terminate the contract to save money. We think this illustrates how Nike can hold off competitors with its industry-leading marketing budgets. Nike’s marketing spending increased to $4.1 billion in fiscal 2023 from $2.4 billion in fiscal 2011.

We believe Nike has a leading competitive position and excellent opportunity in China. While sportswear is a relatively mature category in North America and Western Europe, it has excellent growth prospects in China. Nike is the increasingly dominant player in this market, with 2023 market share of 23%, up from 17% in 2013 (Euromonitor). Its revenue in greater China increased to $7.2 billion in fiscal 2023 from $3.9 billion in fiscal 2016. We forecast compound annual average sales growth of 11% for this segment over the next decade. Although athletics has not been part of China’s culture historically, the nation has become a sports power. It earned the second-most medals (88) in the Tokyo Summer Olympics and hosted the most recent Winter Olympics.

Moreover, the Chinese government is investing hundreds of billions of dollars to turn China into an international football (soccer) power. China plans to open as many of 50,000 football academies by 2025 to train tens of millions of children. As Nike has a huge business in cleats and sponsors many of the world’s most popular players, it will benefit from the growth of this sport. Basketball is also big in China, and we believe Nike will continue lead the market in basketball shoe sales. As greater China is Nike’s highest-margin region (EBIT margins consistently above 30%), growth in this segment has a big impact on Nike’s profits. While we think the brand will continue to do well in China, we do not think it can gain much more market share. The high growth and profitability of the market has attracted many entrants with grand expansion plans, including narrow-moats Lululemon and VF (which owns Vans). Moreover, Nike must compete with homegrown Chinese producers, including narrow-moats Li Ning and Anta.

Nike’s brand is enhanced by its large e-commerce business in the US and other countries. The firm generated $12.6 billion in Nike brand e-commerce sales from its digital marketplaces in fiscal 2023, up from about $1.5 billion in fiscal 2015. The company expects digital sales from its own channels to increase to 40% of its sales in fiscal 2025, up from 26% in fiscal 2023. We think this growth is achievable as more consumers in developing markets (such as China, India, and Latin America) move into the middle class and gain access to broadband services. Nike is investing heavily in its digital services. Its apps, known as NikePlus, have about 160 million members. Its Training Club and Run Club apps are the largest apps in their fields in the US and Europe and its SNKRS app for hard-core shoe collectors reportedly has several million members.

Nike produces limited-edition products that are exclusive to members of NikePlus. For example, more than one third of Cristiano Ronaldo’s Mercurial soccer cleats are available only on nike.com and its apps. Many Nike-sponsored athletes, including Ronaldo, have tens and even hundreds of millions of social media followers. Nike uses their fame to promote its products to a huge audience at relatively low cost. The firm supports its e-commerce with some innovative digital products, such as NikeConnect, a service that allows people to take a picture of a Nike product and identify it. This is a useful service, as Nike estimates there are 5 billion individual Nike products in the world. We believe Nike’s large digital community creates goodwill among its best customers and promotes the brand. While other athletic apparel companies have e-commerce, none of them have the reach of Nike. We think its apps support our wide moat rating.

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Adobe (NAS: ADBE)

  • Fair value estimate: $610
  • Morningstar Moat Rating: Wide
  • Morningstar Uncertainty Rating: High

Adobe provides content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers for creating, managing, delivering, measuring, optimizin,g and engaging with compelling content multiple operating systems, devices, and media. The company operates with three segments: digital media content creation, digital experience for marketing solutions, and publishing for legacy products (less than 5% of revenue).
Business strategy

Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud. The company has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation. The December 2021 launch of Adobe Express helps further broaden the company’s funnel, as it incorporates popular features of the full Creative Cloud but comes in lower cost and free versions. The 2023 introduction of Firefly marks an important artificial intelligence solution that should also attract new users. We think Adobe is properly focusing on bringing new users under its umbrella and believe that converting these users will become more important over time.

CEO Shantanu Narayen provided Adobe with another growth leg in 2009 with the acquisition of Omniture, a leading web analytics solution that serves as the foundation of the digital experience segment that Adobe has used as a platform to layer in a variety of other marketing and advertising solutions. Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. On the heels of the Magento, Marketo, and Workfront acquisitions, we expect Adobe to continue to focus its M&A efforts on the digital experience segment and other emerging areas.

The Document Cloud is driven by one of Adobe’s first products, Acrobat, and the ubiquitous PDF file format created by the company; it is now a $2.8 billion business. The rise of smartphones and tablets, coupled with bring-your-own-device and a mobile workforce, has made a file format that is usable on any screen more relevant than ever.

Adobe believes it is attacking an addressable market well in excess of $200 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher-price-point solutions, and cross-sell digital media offerings.

Moat Rating

For Adobe overall, we assign a wide economic moat rating arising from switching costs. Based on the company’s segments, we believe digital media has a wide moat based on switching costs and digital experience has a narrow moat also arising from switching costs. We believe Adobe’s moat will allow the company to earn returns in excess of its cost of capital over the next 20 years.

Switching costs for software are often driven by several factors, in our view. The more critical the function and the more touch points across an organization a software vendor has, the higher the switching costs. There is also the direct time and expense of implementing a new software package for the customer while maintaining the existing platform and retraining employees on a new system.

Additionally, there is operational risk of changing software vendors, including business process reengineering, loss of data during the changeover, and overall project execution. A major implementation is likely to involve a system integrator and can take in excess of a year in bad cases. Lastly, lost productivity is likely to be an issue as customers move up a learning curve on the new system along with the distraction of users involved in the function where the change is occurring.

Retention metrics typically help inform investors on both the presence and the durability of a moat. These come in two flavors: gross, which describes what percentage of the customer base remains customers after a given period, and net, which highlights what percentage of customer spending is retained by the software provider after a given period. Adobe does not provide retention metrics because its user base has a large percentage of small-business users and periodic subscribers.

Software firms regularly see lower retention rates for small-business users than for enterprise customers. Further, in the case of Adobe, many creative professionals work on a contract basis, meaning that they might subscribe to Creative Cloud for a month, not subscribe for the next month, and subscribe again the following month. We believe Adobe experiences customer retention of 85%-90%, but we also do not think this is particularly relevant for the company, given the dynamics at play with the customer base.

We believe the digital media segment enjoys a wide moat based on switching costs. Digital media represents approximately 70%-75% of revenue. This segment contains Creative Cloud, which is nearly 50% of total revenue, and Document Cloud, which is approximately 10% of revenue. Creative Cloud is composed of iconic products Photoshop, Premiere, Illustrator, and After Effects, among others, and a variety of mobile versions of these products and additional discrete mobile solutions. Document Cloud consists of the Acrobat family of products, including Sign.

We believe Creative Cloud enjoys the widest moat under the Adobe umbrella. Like most software solutions, once Creative Cloud or any of the individual applications contained therein is inserted into the workflow of creative professionals, it becomes very difficult to change solutions. Further, while there is no shortage of competitive point solutions, Adobe Creative Cloud is so pervasive in the creative world that replacing it would be an insurmountable barrier, in our view. Because nearly all creative professionals rely on the Creative Cloud, all other creative professionals must also use it.

While the Creative Cloud has its issues, particularly premium pricing, and any one organization or freelance professional might be willing to switch, they would find it difficult to work in an industry that has generally standardized around it. Similarly, Adobe’s large installed base helps ensure that when the company releases or acquires a related new solution, it immediately faces a substantial and welcoming audience.

Since its introduction in the late 1980s, Photoshop quickly became the industry leader and eventually the industry standard for image editing software. Rather than remaining complacent, Adobe has consistently invested in the solution, introducing new features and adding applications that could be sold to existing users of Photoshop. These features and products were both internally developed and from acquisitions. For these reasons, Creative Cloud still finds itself at the forefront of the industry.

We believe Adobe’s creation of the PDF file format, its first-mover advantage with Acrobat, and significant installed base have created a wide moat based on switching costs for the firm’s Document Cloud. Within Document Cloud, Adobe created the portable document format as an evolution of its original product, PostScript. In 1990, there was no file format that was readily usable across operating system platforms, but by the mid-1990s, there were several products vying for widespread adoption. Adobe’s PDF won, thanks in part to distributing Acrobat Reader for free to personal computer original equipment manufacturers, and has become the standard. Adobe then developed an enterprise Acrobat product as a PDF editor and workflow solution. We believe there are no truly competitive solutions to the PDF file format, even if there is a wide variety of PDF editors in free and paid versions. By any measure, Acrobat remains the gold standard in PDF editors. Over the years, the firm has added a variety of key features to Acrobat, including e-signatures, which became mainstream overnight during the covid lockdowns.

In our opinion, the digital experience segment enjoys a narrow moat based on switching costs. Digital experience represents approximately 25% of revenue. This segment contains Adobe Experience Platform, Adobe Analytics, Adobe Experience Manager, Marketo Engage, and Adobe Commerce, among other solutions. We view Digital Experience as a natural extension of the digital media segment and see the same switching costs that we see for most software companies. Once these applications are integrated into a business process workflow, we believe they are difficult to change. A digital experience platform, by its very nature, is complex, involving numerous applications and touching a wide range of systems and data repositories used by the customer.

Unlike the creative side, Adobe does not have a first-mover advantage in digital experience. The company made its foray into this broad umbrella initially through acquisitions, notably of Omniture in 2009. Since then, it has made other meaningful acquisitions, such as Marketo and Magento, both in 2018, and has also organically added solutions to the portfolio. Through these efforts, Adobe has established itself as a leader in various categories that fall under the digital experience umbrella, including digital marketing analytics, campaign management, and customer engagement, among others.

Digital experience solutions are relatively new compared with the creative side, and unlike with Photoshop, where no serious competitive threats exist, there are a wide variety of large competitors in the various marketing analytics, campaign management, customer engagement, advertising platform, and related areas. While this has been a nascent and rapidly emerging area, more recently we see several companies starting to emerge as leaders with a holistic and complete platform. One of these leaders is Adobe. We believe Adobe’s tightly integrated and robust platform, with its accelerated innovation based on customer feedback from its extensive creative customer base, is seen as a strong suite by the marketplace and well positioned to capture an outsize position in this young and growing market.

Looking for ASX listed shares? Read our article on the 11 ASX stocks offering great value right now.

Teradyne (NAS: TER)

  • Fair value estimate: $135
  • Morningstar Moat Rating: Wide
  • Morningstar Uncertainty Rating: High

Teradyne provides testing equipment, including automated test equipment for semiconductors, system testing for hard disk drives, circuit boards, and electronics systems and wireless testing for devices. The firm entered the industrial automation market in 2015, into which it sells collaborative and autonomous robots for factory applications. Teradyne serves numerous end markets and geographies directly and indirectly with its products, but its most significant exposure is to semiconductor testing. Teradyne serves vertically integrated, fabless, and foundry chipmakers with its equipment.

Business strategy

Teradyne is a heavyweight supplier of automated test equipment for semiconductors, boasting market-leading capabilities that run the gamut of chips. It is one of two companies worldwide that can produce testers for the most cutting-edge semiconductors, thanks to robust engineering talent across hardware and software and a structural lead in organic investment.

The firm is a vital partner to chipmakers across the industry and has an impressively strong relationship with Apple and Taiwan Semiconductor. Teradyne’s market leadership exhibits itself in industry-leading margins, strong returns on invested capital, and a top market share. We give the firm a wide economic moat rating.

Beyond its top-tier capabilities, we think Teradyne is a strong operator. It appears to have found a good balance between organic investment in development and profitability, and it is a good generator of free cash flow despite its capital intensity. We approve of the firm’s use of extra cash for shareholder returns and opportunistic mergers and acquisitions, which have recently focused on the high-growth industrial automation market. We also applaud Teradyne’s strong balance sheet, which shows a net cash position.

We expect Teradyne to complement continued investment in chip testing with investment in the high-growth robotics market. We think the firm’s collaborative and autonomous robots will augment top-line growth over the next five years as well as be accretive to gross margins.

In semiconductor testing, Teradyne will benefit from increasing complexity, specifically the expansion of 3D NAND memory capacity and advancements to new architectures and smaller geometries in digital chips, like 3-nanometer platforms and gate-all-around transistors. We also expect domestic onshoring and capacity expansion to generate demand for the firm’s automated test equipment in the medium term. We view Teradyne as an agnostic play on the global chipmaking market with muted cyclicality arising from its vital role in the supply chain and nature as a capital expense at customers.

Moat rating

We assign Teradyne a wide economic moat rating based on a combination of intangible assets in semiconductor automated test equipment and switching costs created at chipmaking customers. We think Teradyne’s proficiency, which has led to a leading market share in ATE, will enable the firm to earn impressive returns on invested capital that will continue for the next 20 years.

Teradyne provides testing equipment for semiconductors, wireless products, and storage and avionics systems alongside a robotics segment for industrial automation. Teradyne’s automated test equipment for semiconductors drives our wide moat rating, and we observe similar competitive dynamics at wide-moat-rated wafer fabrication equipment leaders under our coverage. Teradyne’s test equipment is highly capital-intensive and serves a relatively concentrated number of chipmaking customers.

In our opinion, Teradyne’s ability to design testing equipment for bleeding-edge chips is the biggest driver of its competitive advantage, representing intangible assets that we don’t think are easily replicable. Teradyne provides testing solutions for nearly every semiconductor on the planet during production, both at the wafer level and final device package level. Teradyne offers testers specialized to processors, microcontrollers, sensors, memory, and analog chips, with the value proposition for each being the ability to test many devices reliably in parallel.

Wafers or packaged chips are run through a testing machine to ensure that the final product meets every specification of its design and to detect any potential defects. Chips and wafers are typically tested at multiple temperatures, and Teradyne’s machines can pinpoint the specific manufacturing step that caused a defect. Building cutting-edge testing machines takes immense engineering effort across ASIC design, software programming and mechanical engineering.

According to management, Teradyne’s latest machine took over five years, 600 engineers, and $500 million of cumulative research and development spending to develop. Furthermore, as chips become more advanced, with increasing transistor counts, smaller geometries, and new architectures like 3D NAND in memory and GAA transistors, testing grows more complex. Testing chips with more transistors and smaller, more intricate architectures is significantly more time-consuming than it is for their legacy predecessors.

With reducing time to market being the end goal of chipmaking customers, Teradyne earns revenue by bringing new testers to market that can validate newer chips more quickly.
Teradyne and its largest competitor, Advantest, are the only suppliers able to service the latest process technologies across such a wide breadth of products and the best at reducing customers’ time to market. The ATE market is a practical duopoly between Teradyne and Advantest, which together hold more than 80% of the market, by our estimation, with Cohu as a clear-cut but distant tertiary player.

Teradyne and Advantest are broad-reaching generalists distinguished primarily by their customer relationships and leadership for certain product types. For example, Teradyne has Apple as its largest end customer and is particularly strong in NAND memory testing, while Advantest has a strong relationship with Samsung and has historically been strong in DRAM testing. Beyond Advantest, we don’t think any player can match the depth or breadth of Teradyne’s capabilities across semiconductor testing, providing market-leading equipment for the most cutting-edge chips across numerous chipmakers and product categories (digital, analog, memory).

In our view, Teradyne holds a durable position at the cutting edge of automated chip testing due to a hefty R&D budget that has led to its leading market share. Teradyne is able to spread a massive development budget across multiple capital-intensive business lines, allowing it to service every chipmaker in the world with testing equipment for a broad variety of cutting-edge products. Market shares can fluctuate year to year with order patterns of large customers, but by our assessment Teradyne has historically edged out Advantest in overall share and the size of its R&D budget. Teradyne’s R&D spending has grown steadily with sales, and roughly quadruples that of Cohu. When combining investment in R&D and capital expenditures, the difference is even more stark, and edges out even rival Advantest.

While we expect Teradyne and Advantest to continue slugging it out at the top of the market, we think the sheer size of the investment both firms can put into developing new equipment is a massive barrier to upstart competitors. We expect Teradyne to continue to pump cash into R&D and capital expenditures to retain its leading market share and expect steady competition with Advantest, with no significant encroachment from smaller competitors at the bleeding edge.

We contend that Teradyne’s equipment also elicits switching costs at customers. We view Teradyne’s installed base of expensive equipment across customers as sticky, especially given the software the firm layers on top of its hardware; customers become accustomed to its Teradyne machine interface and integrate it into their workflows. In our opinion, a customer would be averse to switching to a new brand of tester due to the cost and integration time required for the transition. Beyond installation, it takes a customer time to develop new testing programs, ramp up use of a new machine, and integrate it fully into its back-end workflow.

When adopting a new machine, a customer’s engineering teams will take a training class and develop smoother and more efficient workflows over the course of a few years as they become familiar with its capabilities. When moving to a new generation of Teradyne tester, many of the hardware and software intricacies will be familiar, if not identical, and enable a much quicker ramp up to full speed. If a customer switched test suppliers, it would have to teach its engineers wholesale new intricacies of the new hardware configuration and software interface, as well as face the opportunity cost of lost productivity and slower time to market with a less familiar staff in the first year or two.

We think the addition of services augments Teradyne’s existing switching costs, but these are a small contributor to revenue and overall stickiness. The majority of services are break/fix, but about one fourth of them are professional services, where Teradyne service engineers help a customer develop test programs on its machines. We think these services are especially sticky, as a customer is reliant on Teradyne’s know-how to troubleshoot the program and will rely on its services to transfer existing programs to new testing machines.

Teradyne’s competitive advantage in ATE—driven by leading capabilities, robust investment, and sticky customer relationships—exhibits itself clearly in the firm’s profitability and returns on invested capital and is evidence of a wide economic moat, in our view. Furthermore, Teradyne’s profitability leads the industry, with gross margins consistently above Advantest’s and materially higher GAAP operating profitability. We think its structural competitive advantages and excellent profitability resulting from strong execution will combine to drive market leadership and an enduring economic moat over the long term.

While we think Teradyne’s moat is driven by its semiconductor testing abilities, we think its industrial robotics businesses will quickly contribute more to overall returns. We would award this segment a narrow economic moat in isolation. Out of industrial automation, Teradyne sells collaborative robots (cobots) and autonomous mobile robots into manufacturing applications. Via its 2015 acquisition of Universal Robots, Teradyne holds a leading market share for cobots, which are designed to work alongside humans.

Similarly, Teradyne entered the autonomous robot market in 2018 with its acquisition of MiR. We think both of these businesses elicit switching costs at customers, given long useful lives and integration into workflows that we think customers would be averse to upending. In cobots, we think Teradyne bought significant intangible assets, which are exemplified by it continuing to hold a leading share of the market. Its cobots offer hundreds of different attachments to fit different uses and feature an open network of third-party development, UR+, for more to be developed. We think these robots provide immediate and material value to customers by taking both mundane and arduous tasks out of human hands and increase a customer’s overall return on investment in human capital.