The Gartner Magic Quadrant
As most members of the MyWallSt community will know, our analyst team uses a lot of different parameters in assessing potential additions to our market-beating shortlist of stocks.
Here’s a high-level overview of one of the most common frameworks that we use — assessing companies from both a quantitative (left-brain) and qualitative (right-brain) point of view:
Considering investment opportunities in this way is a pretty easy concept to grasp, but more granular than this are the specific tools and resources we use to find out if a company satisfies the criteria laid out in the above image.
Left-brain concerns like insider ownership can easily be researched on sites like Yahoo Finance, Morningstar, or in the financial information public companies provide themselves on their Investor Relations page. However, right-brain concerns can be harder to figure out.
You might have had a great customer experience with a company like Bill.com, for example, but how do you know that this is a common experience amongst its entire customer base? How can you tell if the management is putting its money where its mouth is in terms of positive company culture amongst employees? Is the CEO really a visionary leader or just a person that can convincingly talk the talk?
There are many specific services and tools we use, but one of the most effective in our arsenal for assessing technology companies is the Gartner Magic Quadrant. Gartner is a global research and advisory firm and their Magic Quadrant helps to identify all of the current players in a specific tech sector and how they relate/compete with each other.
The Magic Quadrant is primarily produced as an aid to help companies that are trying to figure out the best solution to use for their day-to-day operations. However, us wily investors can also use the quadrant as a valuable research tool.
For example, take a look at the recent Magic Quadrant for Meeting Solutions, something that a lot of old-world companies will have been scrambling to research over the past 12 months:
As you can see above, companies can fall into one of four distinct quadrants: Niche Players, Challengers, Visionaries, and Leaders.
As per Gartner’s own definition:
Leaders execute well against their current vision and are well positioned for tomorrow.
Visionaries understand where the market is going or have a vision for changing market rules, but do not yet execute well.
Niche Players focus successfully on a small segment, or are unfocused and do not out-innovate or outperform others.
Challengers execute well today or may dominate a large segment, but do not demonstrate an understanding of market direction.
On viewing this, it’s clear that companies occupying the top-right-hand corners are the most lucrative in the space. Although that is ostensibly true (Zoom and Microsoft are both highly successful selections on our shortlist), it does not mean that we should just ignore companies that fall into any of the other quadrants either.
‘Challengers’, for example, are companies that are most likely to usurp the current market leaders in the future — a cohort that might well be the next high-growth stocks.
Funnily enough, the Magic Quadrant also has very interesting second-order effects. Companies that feature in the coveted top-right are considered the absolute best in field solution, which drives more customer traffic towards them. This, in turn, increases their sales figures, the money available to invest in things like R&D, and their ability to hang on to their spot at the top of the leaderboard… kind of like the compounding effects of success.
Of course, valuable analysis like this comes at a cost and you must pay Gartner for access to such information. However, such is the prestige that comes with being included in Magic Quadrant that many companies will issue press releases themselves just to say that they’ve made the cut. Here’s Microsoft’s press release on its inclusion in a different Magic Quadrant — this time for Analytics and Business Intelligence Platforms.
Definitely something to keep an eye out for when researching a potential investment.