2 Stocks With Serious Competitive Advantages

One of the tenets of successful long-term investing is betting on companies that enjoy durable competitive advantages. These competitive advantages come in many forms, but the result is the same: An edge that allows the company to outpace the competition and potentially generate outsize profits.

Two companies that enjoy significant competitive advantages are Nvidia (NASDAQ: NVDA) and Unity (NYSE: U) . Here's why these stocks should stand out to investors.

Nvidia

Graphics chip company Nvidia has run away with the market for AI accelerators . Its market share is estimated as high as 95% despite increasing competition from AMD , Intel , and others. Nvidia's most powerful AI chips cost tens of thousands of dollars each, a price customers are happy to pay as they race to satisfy soaring demand for AI computing capacity.

Nvidia's hardware is powerful, but its software is what locks customers into its ecosystem. Nvidia's CUDA, a proprietary software platform that allows developers to tap into the company's GPUs, has been around since 2007. It's widely used across industries and in academia, becoming the de facto standard in its nearly two-decade existence.

CUDA only works with Nvidia GPUs, so many customers running CUDA code are stuck. AMD sells its MI300 family of AI accelerators, which the company expects to bring in around $4 billion in sales this year, and Intel is launching its latest Gaudi 3 AI chip this year. But because neither is compatible with CUDA, Nvidia will continue to dominate the market for the time being. The company generated $22.5 billion of revenue in its data center segment during the latest quarter alone, and that number could approach $100 billion for the full fiscal year.

Nvidia's dominance will eventually erode as alternatives to CUDA gain traction and the draw of lower-priced AI chips prompt customers to jump ship. But for now, the company's entrenched software platform is driving incredible revenue and profit.

Unity

Video game engine developer Unity is reeling after an attempt to generate additional revenue from its user base last year was bungled so badly that it led to the ouster of the CEO . Unity attempted to introduce a Runtime Fee, which would have charged developers for each install of their applications. Many details were left out, and the fee was initially set to be applied retroactively to already-released games. The furor from Unity's customers was intense, and the company largely backed down.

With Unity struggling to find a way to bring in more revenue, the company is working on the other side of the equation: Costs. Unity laid off 25% of its workforce earlier this year, and it's exiting non-core businesses as it tones down its ambitions. Unity got a new permanent CEO in May, Matthew Bromberg, who helped turn around mobile game giant Zynga as COO.

While Unity is in turmoil, its core game engine business enjoys a major competitive advantage that should help the company thrive in the long run. Unity benefits from strong network effects . There's such a large community built around its game engine, with myriad resources and content aimed at helping developers, that choosing a lesser-known alternative rarely makes sense. The more developers that use Unity, the more appealing the platform is for new projects.

Network effects can be undone by serious missteps, and Unity has certainly made plenty of those. But even as developers fume at the company's mistakes, Unity remains a go-to choice in the video game industry. If the company can make progress convincing developers that it won't try another misguided cash grab, it should remain one of the leading game engines as the industry grows.

Timothy Green has positions in Intel. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Unity Software. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy .