An era of disruption: How to invest?

It is a common law of investing that the most rewarding opportunities are often the riskiest, and that is certainly the case with today’s hottest sector, disruptive technology.

The rewards of investing in innovative tech stocks have been enormous, and the most evident example would be Tesla, with its share price skyrocketing from $90 in 2020 to $900 in early 2021. However, so are the risks, as the electric car maker’s stock fell nearly 40 per cent from its all-time high this year, punishing investors who bought in late.

What is disruptive technology?

Disruptive means radical change to an existing industry or market due to technological innovation. It introduces a technologically enabled new product or service that potentially changes the way the world works.

To cite an example, in the late nineteenth century, three innovation platforms evolved at the same time and changed the way the world worked. Thanks to the telephone, electricity and automobile launch, the world’s productivity amplified while costs plunged, unleashing demand across sectors. Today, the global economy is undergoing the most significant technological transformation in history thanks to multiple innovation platforms evolving simultaneously- artificial intelligence, genomic revolution, blockchain, among others.

History has shown that new emerging technologies which transform major industries and radically impact society have often created enormous wealth-building opportunities. (e.g., Smartphones in the 2000s, 3G/4G networks) So, it can rightly be said that innovation is the key to real growth.

Artificial Intelligence (AI) to transform all sectors in the economy

AI learning systems have the power to transform all sectors in the economy, even those previously thought impervious to disruption, notably health care and financial services.
The growth opportunity within the AI space could be exponential. To put things into perspective, until recently, humans programmed all software. However, now with deep learning, a form of AI, data is used to write software. By automating the creation of software, deep learning could turbocharge every industry.

According to ARK, deep learning will add $30 trillion to equity market capitalisation during the next 15-20 years, up from $2 trillion in 2020. To understand how enormous this opportunity could be, it took over two decades for the internet to add $13 trillion to equity market capitalisations globally. It was well witnessed by all how tech stocks benefited from the same.

Green power to replace fossils

Many green technology sectors are hitting crucial points, transitioning from being hypothetical to realised technologies and finally seeing their products become profitable. In some cases, social pressure has finally tipped the scales in the disruptor’s favor. That doesn’t mean every green company is an investment, but this is a space where an investor should be present. For example, for a long-time, electric vehicles were hampered by short battery ranges and high costs. Buyers of an electric car were buying a less efficient product at a higher price. Things are different today; production costs are falling, consumer preferences have changed, and the technology for battery range and battery charging have advanced.

In sum, electric vehicles are the auto industry’s future, and nearly all auto companies are shifting in that direction. Similarly, clean power has become substantially more competitive over the past several years. Solar and wind energy have gone from being fringe ideas only suitable in specific geographic locations to be the cheapest option when assessing new power projects.

Genomic revolution to transform healthcare

The next wave of innovation in healthcare treatment is already underway and involves using genetic information itself to understand how the body works on a molecular level.
A full human genome sequence was first completed in 2003. The idea was to use that information to identify patients, detect the disease earlier, and match patients to precision therapy. The cost was roughly $3bn to sequence all the genomes in the human body then, and it took over a decade of computation. Fast forward to today, that same sequencing costs as little as $600 and only takes hours to assemble. As the price to sequence a whole human genome falls precipitously, DNA sequencing, a test once limited to the research lab, could see extensive clinical adoption and a hundred-fold increase in volumes, transforming health care altogether.

The technological and scientific developments in DNA sequencing, gene editing, targeted therapeutics, bioinformatics, and agricultural biology can help restructure health care, agriculture, pharmaceuticals and enhance the quality of life.

To cite another example of the enormous benefits surrounding genomic revolution: Early cancer detection through the reading of DNA signals in the blood is likely to become a reality within the next five years. With the progress seen in DNA sequencing, medical science could also have a cure for genetic disorders that previously didn’t exist and picking the right stock could be a multi-fold investment opportunity.

5G adoption to expand exponentially

The emergence of 5G networks is arguably one of the most valuable and transformative developments. The technology provides faster wireless Internet access, with more bandwidth and minimal delay. Since the coronavirus outbreak forced people to stay indoors, global internet use skyrocketed, creating a growing need for faster internet, more precisely 5G network which will be the technology to watch out for within the next decade.

Robots are coming

Earlier, people were less willing to engage with AI-infused technologies. However, the life-threatening coronavirus seems to have changed this blinkered vision for good. Robots are taking over the work environment earlier than expected. Advances in software and sensors should enable robots to operate alongside humans in all sorts of environments. Besides, the rise in the aging population has also boosted the space, thanks to increasing demand for health monitoring and self-treatment, especially amongst elders.
If the unit costs decline significantly while their capabilities increase, as anticipated, robots should transform every business that depends upon physical processes and workflows. If you fear losing your job to a robot, this is one risk you should undoubtedly consider hedging.

For example, ARK’s research suggests that autonomous ride-hailing will cut the cost of mobility to one-tenth the average cost of a taxi today, spurring widespread adoption. They predict autonomous ride-hailing platforms will generate more than $1 trillion in profits per year by 2030. In addition, automakers and fleet owners could enjoy profits of $250bn and $70bn, respectively.

Blockchain technology – an upcoming game changer

The technology is being utilised to enhance smart payment systems, enable quick global money transfers, secure financial transactions, trace data, advance shipping, and transportation, modernise government agencies and institutions, and even detect critical illnesses. Growth in IoT, autonomous vehicles, augmented reality /virtual reality, and coronavirus crisis-induced rapid adoption of cloud computing are expected to drive the adoption of blockchain technology in years ahead.

Disruptive innovation—often mispriced

With world economies reopening, many thought it was the end for innovative and growth stocks, with investors shifting their portfolios to value stocks. Although it is unlikely the market is undervaluing a large band of growth stocks at their current prices, it is possible that the market still doesn’t fully recognise the magnitude of changes in the business and economy. As a result, it may undervalue some innovative companies with strong yet risky growth prospects. Catherine Wood, an investor who runs ARK investment management, quoted that “Disruptive innovation is often not priced correctly by traditional investment strategies because people may not understand how big the ultimate opportunities are going to be.”

Interestingly, many of the innovative stocks are currently trading a significant discount from their highs. Investors willing to take the risk might pay off to start adding shares of such companies that have substantial long-term potential.

Devesh Mamtani is the chief market strategist at Century Financial