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Some companies, often hidden in the market, are indispensable for their customers. They provide something the end user cannot do without, which is critical to their mission. This blog explores three aspects: the meaning of “mission-critical”; its close link to moats and durable quality; and how these businesses offer the best fundamentals potentially making them compelling investment opportunities.
Key Takeaways:
- Mission-critical goods and services are those without which their customers cannot
operate. Often these products and services involve everyday transactions, a toll, that is far smaller than the economic value they facilitate. - The TOLL universe contains such businesses. Debt ratings, railroads, and credit scores are all mission critical for the businesses and consumers that use them.
- The concept of mission-critical businesses links closely with that of strong moats.
These moats are durable, dominant, and tangible. - Mission-critical businesses can have attractive financial features, such as inelastic
demand, pricing power, and highly recurring revenues.
What is a Mission-Critical Good or Service?
Customers see certain goods and services as "mission-critical" or essential. Without them, normal course of business could not happen. Paying a toll to avoid congestion, swiping a credit card to make a payment, the engine powering a commercial flight, or the credit score on a credit application are all essential goods and services of the modern economy.
These often involve small, everyday transactions. Their value is small compared to what they facilitate. A rating is a small fee in the context of a billion dollar debt issue. A credit score is just $5 compared to thousands in mortgage closing costs and hundreds of thousands in house value. A ton of aggregates, used to make concrete and asphalt, costs just $20 which is very small compared to millions spent on construction projects.
The best of such businesses sustain their position by providing considerable value to their customers over time. Whether making accepting payments easier and safer or facilitating cheaper more efficient transport, value accrues to customers. This value often rises over time and with more activity, solidifying these businesses in the eyes of their customers.
What Are Examples of Mission-Critical Goods or Businesses
Mission-critical businesses are difficult to identify and form the core of the universe of the Tema Durable Quality ETF (TOLL).
| Product/Service | Companies | Why Are They Mission Critical |
| Debt Rating |  
|
Ratings are the lifeblood of fixed income markets. |
| Railroads | 
|
|
| Indices | 
|
One of the best examples of mission critical is when the company’s services are part of the core infrastructure of an entire industry. MSCI/S&P indices are included in regulatory documents and even CVs, powering the investment industry. |
|
|
|
|
| Exchanges | 
|
To execute trades efficiently requires liquidity which is only available for certain financial instruments on certain exchanges. CME for example is the only venue to trade Treasury futures – a $645 billion notional value per day market. |
| Jet Engines | 
|
For modern commercial aviation the jet engine is mission-critical, with only a few firms in the world that can build and maintain them |
| Consumer Card Payments |
 |
Visa is the rails on which the world’s consumer payments sit, processing $15 trillion per year. For a small fee, their service is ubiquitous and essential for any business hoping to accept payments from consumers |
| Airports | 
|
|
| TOLL Roads | 
|
Real assets like toll roads allow users, for a small fee, to avoid congestion in urban areas. This creates huge value for individuals and businesses |
What Are Not Mission Critical Businesses?
A useful way to define something is to invert it – what businesses are not mission-critical.
Consumer-facing firms rarely sell products or services that are mission-critical to consumers. The consumer discretionary sector sells non-essential products. Whether buying Nike sneakers or one of the many other footwear brands, the product and brand do not meet the criteria of being indispensable for consumers. The same argument can be leveled even if the product is a staple. Here consumers are spoiled for choice with increasing competition making even staple companies, like Campbell Soup or snack company Mondelez, dependent on marketing and distribution for their profits.
The value of firms like Nike and Campbell Soup comes from their brand, which is a weaker form of moat. While Disney owns some of the best intellectual property in media, these are not mission-critical to the end user. Brands alone are not enough to make products mission-critical for consumers.
Technology is another area where a product's importance can be fleeting. Firms considered indispensable in the PC era, failed in the mobile-internet era. Similarly, as the age of AI begins, it is uncertain if current leaders will remain essential to customers
How Does Mission-Critical Business Confer
a MOAT?
- Economies of Scale - The more a company produces the lower the cost of each individual item produced. As costs come down these cheaper items become vital for other businesses to function – making them critical to achieving their objectives. Countless companies and industries rely on cheap manufacturing of advanced semiconductors for the existence of their business.
- Network Effects - A network's value increases with each new user. Eventually, these
networks become essential. Trading treasury futures and energy commodities would not be possible without exchanges like CME and ICE. - Non-Replicable Physical Assets - Physical infrastructure often creates a natural
monopoly, as replication is neither economic nor rational. Such infrastructure is often linked to essential goods and services like railroads and telecommunications towers. - Regulation - Governments often spur innovation which creates goods and services that are essential. For example, patent protection incentivizes pharmaceutical companies to innovate life-saving treatments.
- High Switching Costs - The single most relevant source of moat when it comes to mission critical goods and services is switching costs. Switching is inherently prohibitive for a business, effectively making costs infinite. Replacing a jet engine, for example, would essentially ground an aircraft, requiring years of re-certification.
Why Are These MOATS Durable, Tangible and Dominant?
The preceding discussion suggests that mission-critical businesses have stronger moats than those typically discussed in investing. Although intangible value is often listed as a sixth source of moat, it is difficult to consider a brand mission critical. Consequently, mission-critical firms' moats are typically more durable, tangible,
and dominant.
- Durable - Their essential nature means revenues are recurring. The longevity of these revenues often extends for decades, as seen with examples like airport concessions
- Tangible - They are either real assets, like a railroad, or embedded in customer processes they are infrastructure-like. This is in contrast to intangible value which
is rarely associated with being mission-critical - Dominant - Providing indispensable goods and services confers on companies a high market share which can often be described as monopolistic. This dominant position is sustained over time as more value accrues to customers
What Does Mission-Critical Mean For The Financials Of A Business
Firms that provide mission-critical products and services exhibit business qualities and
financial metrics that are valued by investors.
An essential product or service benefits from inelastic demand. As the price of the product rises the amount consumed does not fall. This means firms that sell these products have pricing power. Importantly the best kinds of firms don’t abuse this pricing power, choosing instead to keep adding value to customers and pricing according to this value. For example, Visa provides a mission critical service by facilitating trillions of payments every year for a small fee. Demand for Visa's service would not change if the fee were higher. Prudently, Visa offers extra services, like speed and fraud protection, with prices rising only alongside this added value.
Mission-critical firms also tend to have highly recurring and visible revenues. Customers purchase these goods and services repeatedly to maintain their own business. In many cases the charge is small – a toll. MSCI, for example, provides mission critical index and other types of data for the functioning of financial markets. The firm's retention rate exceeds 96%, ensuring highly recurring revenues. This type of revenue stream creates very stable earnings streams and potential for consistent reinvestment. As a result, such companies are resilient regardless of the overall economic environment. Investors often place a high multiple on such earnings streams as these companies sustain high returns on invested capital.
Bottom Line
Investing in mission-critical businesses selects potentially the best companies in the stock market today. These durable quality firms are essential for their customers, benefit from highly recurring revenues and returns.
[1] SIFMA
Disclosures
For the fund's current holdings, visit the fund detail page.
