Do AI Moats Exist?

Motley Fool Hidden Gems Investing

In this episode of Motley Fool Hidden Gems Investing, hosts Travis Hoium, Lou Whiteman, and Matt Frankel debate whether durable competitive adv

Key takeaways

Traditional moats are rare in AI due to rapid model turnover and lack of pricing power.
Distribution networks (e.g., Google's Gemini) and deep workflow integration offer temporary but meaningful competitive advantages.

Main topics

AI Moats and Competitive Advantage
Fragility of Market Leadership in AI

Notable quotes

"I don't think moats really exist... they're really only recognizable in hindsight." – Lou Whiteman

"The capability is not the moat." – Matt Frankel

Conclusion

While AI moats appear fragile due to rapid innovation and shifting market dynamics, long-term

Transcript preview

Speaker 1 (0:01) Do moats exist in AI? Motley Fool Hidden Gems investing starts now. Speaker 1 (0:09) Welcome to Motley Fool and Gems Investing. I'm Travis Hoey. I'm joined today by Lou Whiteman and Matt Frankel. Guys, it's kind of an interesting time of the year because we're at the end of the calendar third quarter. Earnings season hasn't begun yet, but there is a lot of moving and shaking in the world of artificial intelligence. A couple of IPOs that are potentially coming in the next month to six months with Anthropic likely to be first. So I wanted to talk about if we're looking at some of these companies, let's take a big picture approach. And one of the questions that I have is, do moats really exist in artificial intelligence? If you look at the history of investing, finding companies with moats is a phenomenal way to make money. In the 80s, moats were driven by supply and big brands. So just, you know, buy the biggest, best brand you possibly can. The retailer with the most customers are going to do phenomenally well as investor. Aggregators kind of won the demand platforms, Amazon, Netflix, Uber in the 2000s and the 2010s. But Lou, do moats exist in the world of artificial intelligence? Because it seems like one exists for five minutes and then another model is released and everybody moves over to ChatGPT and then Muse is released. So now everybody's trying out Muse. It seems like these are incredibly fragile moats or do you see it differently? Speaker 4 (1:27) So, Travis, you should have given me a trigger warning here because this is a hill I'll die on. I'm a terrible person to ask this in part because I think 99 % of the discussion of moats in finance is just balderdash. I don't think moats really exist. If they exist, they're very rare. And as an investor, they're really only recognizable in hindsight. I don't think in real time. There are plenty of examples. There was a famous 2014 book about the value of moats. And you look through the there's 20 or so companies that are mentioned in that half of them are out of business now. OK, so, you know, everything I mean, all we're really talking about is competitive advantage that gets to a point where you can't overcome it. I don't see any. moats in AI, almost by definition, because none of these companies even have pricing power. How can you have a moat? How can you have this idea that, you know, like you are, you cannot be conquered when you can't even control the terms with your customer on pricing? I don't see any permanent competitive advantages here, and I don't anticipate that happening anytime soon. Matt, do Speaker 1 (2:32) you see it the same way? Speaker 4 (2:33) I'm a little less, Speaker 5 (2:35) you know, pessimistic about the moats in AI. Lou. But the moats definitely appear fragile. So, I mean, what I mean by that is a couple years ago, ChatGPT clearly had the first mover advantage. A year ago, they had a 79 % market share when it came to just query volume. That was to start 2025. Now it's down to 54%. That's 25 percentage points of market share that's gone. In the same time, Claude went from roughly 1 % to 9%. Speaker 5 (3:07) The capability is not the moat. That's one place where Lou and I will clearly agree. All of the frontier AI models are within a little, you know, a narrow band when it comes to capability. There's a couple of true moats that I see. I don't know if anyone's captured them completely yet. One is capturing enterprise workflow, like being ingrained in workflow. It's the same reason that some of the software companies that, quote, could be disrupted by AI. are still growing their revenue faster, not seeing too much customer return. It's because they're embedded in workflow. Like, Cloud Code is a big example of that. I use Cloud Cowork every day. Like, I'm not going to switch that to a more capable model because I already depend on it. The other one is distribution that I see. Think of Gemini. Gemini usage is up 450 % over the past year. And why? Not because they have pricing power, not because anything of that, because they... Gemini is ingrained into everything Google does. It's being force-fed to everyone who uses Google Maps, who uses Gmail, who uses Google Search. So distribution is a big competitive advantage. I don't know how durable of a mode it is, but that seems to be something that could have some staying power here. Yeah, as Speaker 4 (4:24) impressive, it's the same reason we all use Bing, right? Speaker 5 (4:29) Oh, Speaker 1 (4:29) man, bring it up. Well, so that does bring me to my other question, which is when we look at this space, what seems so different than in the past, whether you're looking at consumer packaged goods or retailers or even just the last 20 years in technology, that was all companies that the companies ended up winning, ended up beating the competitors that they had. But then they weren't competing with also all the other companies. Right. Like the banana company isn't competing with the cereal company. But now we have all of these tech companies, all of them, in some way competing with each other in the future of AI. So you have Anthropic takes the lead early this year. And then suddenly, out of nowhere, Meta, who we thought was kind of done and dusted, is now potentially as the most compelling product release of