Pricing power allows companies to sell their products at a premium without losing business. Companies with pricing power can withstand economic slowdowns better than most and are in a strong position to defend their market share.
VMware (NYSE: VMW)
VMware provides IT infrastructure to businesses around the world. They have managed to maintain a gross margin above 84% for the last 5 years, while steadily growing revenues and earnings.
The stock price has rallied 57% since November and may be a little pricey at current levels. However, it’s a stock to watch if there is a pullback, or if you are looking for a more defensive component to your tech portfolio. Over the long term, VMware should have a strong underpinning from the cloud computing industry it supplies.
MSCI (NYSE: MSCI)
MSCI provides analytical products to investment companies around the world. It owns all the intellectual property related to the well-known MSCI market index products. This is what gives it a wide moat and its competitive advantage.
The company’s gross margin is 80% and its operating margin is over 47%. Those margins allowed the company to earn $496 million in net income on revenue of $1.43 billion in the last year. While the stock is not cheap, it’s a lot cheaper than most companies that are this profitable. In addition, MSCI pays a dividend with a yield of 1.19%.
Adobe (NASDAQ: ADBE)
Adobe sells a suite of market-leading products for creative professionals. While Adobe’s individual products do face competition, no other company is able to offer such a comprehensive range of products bundled together. The company has also managed to a successful transition to a SaaS business model, and now sells most of its products via its Creative Cloud. Furthermore, the growth of digital industries ensures that it is selling into a growing market of creative professionals.
Adobe enjoys a gross margin of 86% and an operating margin of 29%. In the last five years, its gross margin has not fallen below 84%. The stock may be expensive at the moment, but any pullback may be short-lived as the stock has become very popular recently.
Verisign (NASDAQ: VRSN)
Verisign provides domain registry services for the most popular website domains in the world. The company actually has a monopoly on many of these domain services, though their pricing is to an extent regulated.
That hasn’t stopped Verisign building a business with incredibly strong margins. Its gross margin is 86%, its operating margin is 67% and its profit margin is 47%. This is why it was one of the first of only a handful of tech stocks that Warren Buffett has invested in.
Dolby Laboratories (NYSE: DLB)
Dolby is another company that leverages its intellectual property to ensure it has pricing power. The company supplies innovative audio and imaging technology to the entertainment, communications, and electronics industries. Recently Dolby has managed to gain traction in the smartphone market and even counts Apple as a customer.
Dolby’s gross margin has actually slipped from the 94% level it was at 5 years ago – but it still makes a gross profit of 87% of its revenue. That translates into a 24% operating margin and allows the company to pay a 1.2% dividend. Unlike most other high margin tech businesses, Dolby is not trading on a demanding multiple, and trades on a PE/Growth ratio of 1.43.