Disruptive Innovation: An Opportunity for Growth

Game-changing technologies are creating secular growth opportunities and reshaping the investment landscape.

March 02, 2018

Innovation is ongoing, sometimes sustainable, and occasionally disruptive. Disruptive technologies transform industries and drive change in the world that we live. Mobile Internet, e-commerce, and video streaming are some of the latest industry-changing technologies that have transformed a typical day for people over the last decade, while trends such as artificial intelligence, big data, and DNA sequencing could be the next disruptors.

The potential for growth from technology disruption continues to be unprecedented. Since the launch of smartphones, the pace of change has been occurring at breakneck speed with seismic effects. Looking ahead, the pace is not moderating, but rather is accelerating (see exhibit below).

Other secular growth drivers in the tech sector include the shift to cloud computing, increasing corporate focus on customer-facing applications, and the emergence of mobile as a primary user interface in enterprise applications. Big data is providing unparalleled information-gathering and analyzing capabilities that are materially affecting the way businesses gauge their operations and make decisions. Through deep learning and artificial intelligence, companies are able to observe consumer patterns, anticipate what consumers need before they know they need it, and deliver life-changing products and services. In health care, advances in human genome mapping and gene-sequencing technology have coupled with a significant new understanding of the underlying biology of diseases to cure or treat them. These remain largely untapped markets and include areas such as noninvasive prenatal testing, oncology, and reproductive and genetic health.

 

Game-changing technologies are creating secular growth opportunities detail

Technology

Compound Annual Growth Rates Through 2020

Artificial Intelligence1

55%

Big Data2

23%

Cloud Computing3

22%

DNA Sequencing4

19%

Industry Transformation

As companies and consumers increasingly use technology, innovation is dramatically affecting not only that sector but many other industries as well.

Automotive

Electric cars are competing with mainstream vehicles and will continue to be in demand as prices become more competitive with internal combustion engine vehicles. Camera-based computer-vision, machine-learning, advanced driver assistance systems, and autonomous driving technologies are profoundly changing the way we drive. Additionally, ride sharing, led by internet-based application companies Uber and Lyft, is reducing the need for autos in urban areas, which could eventually lead to a reduction in auto demand over the long term.

Retail

Technological innovation and internet platforms continue to drive commerce away from traditional brick-and-mortar retail to the internet. Although it seems that e-commerce has been around for a long time, it still only represents 10% of overall retail spending in the U.S. today, even as it continues to capture market share. E-commerce is growing at 15% annually versus minimal growth for traditional retail.

Advertising

The growth of internet search, internet platform services, and social media has transformed the market for how advertising dollars are spent. As consumers spend more time on-line and less time utilizing traditional media, the lion’s share of dollars continue to shift online. Some advertising experts are predicting that by 2020, 50% of all advertising dollars will be spent online.

Mobile Payments

Mobile payment is another technology that is scaling rapidly today and should be a large growth driver in the future. Today, most of the growth is occurring outside of the U.S., primarily in emerging markets. In China, the banking system is not well established, which provides an opportunity for the Internet companies. In 2016, Chinese payment companies processed $5.5 trillion worth of mobile payments and it’s been increasing at a very rapid pace. That is 50 times the amount transacted in the U.S. Mobile payments have yet to take off in the U.S. because the credit card system is well established and the major players are still executing well.

Healthcare

A large reduction in the cost to map the human genome has led to advances in gene sequencing and editing. This has prompted an innovation cycle for companies to identify gene function and develop drugs that precisely target underlying disease mechanisms. The cost to sequence a genome dropped from almost $10 million in 2008 to close to $1,000 today. The first human genome took $2.7 billion and almost 15 years to complete.

Companies Driving Change

Industry disruptors are expected to be a source of high growth over the long term, even in a slow growth world. According to Jennison Associates’ Global Equity Team, “many of these companies are innovative leaders with network effects that create economies of scale leading to significant competitive barriers that foster the sustainability of their growth.” Disruptors such as Tencent, Amazon, and Netflix are good examples of companies that have completely transformed the industries in which they compete.

It is important to bear in mind that the ultimate winners are not yet clear as disruptive innovation is still in process. Competitive responses to new technology are swift so the first to the game is not always the eventual winner.

Capitalize on Emerging Trends and Technologies

Successfully investing in innovative technologies and companies requires a deep understanding into how the technologies will drive a company’s fundamentals and equity performance. Experienced investment professionals able to recognize structural shifts in the marketplace, and identify and gauge the duration and magnitude of growth, revenue optionality, and competitive advantages are critical to investment success. Observing consumer buying patterns, new addressable market opportunities, digital disruption, and scientific breakthroughs can create significant opportunities for investors.

Download the full infographic, Disruptive Innovation = Investment Opportunity  PDF opens in a new window.

Contact your financial professional to learn more about investing opportunities.

Footnotes

1 “Worldwide Cognitive Systems and Artificial Intelligence Revenues Forecast to Surge Past $47 Billion in 2020, According to New IDC Spending Guide,” International Data Corporation (IDC), Oct. 2016
2 Worldwide Big Data Technology and Services Forecast, 2016–2020, IDC, Dec. 2016
3 “Worldwide Public Cloud Services Spending Forecast to Reach $122.5 Billion in 2017, According to IDC,” IDC, Feb. 2017
4 “DNA Sequencing: Emerging Technologies and Applications,” BBC Research, May 2016

The comments, opinions, and estimates contained herein are based on or derived from publicly available information from sources that Jennison Associates believes to be reliable. We do not guarantee the accuracy of such sources or information. Investing involves risks. Some investments have more risk than others. The investment return and principal value will fluctuate and the investment, when sold, may be worth more or less than the original cost and it is possible to lose money. Past performance is not a guarantee of future results.

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