Disruptors And Those Who Will Be Disrupted

Going back to the previous decade, we sometimes forget what happened in the 2010s that brought about the speed of change from a technology point of view.

Facebook, for example, listed only in 2012 – yet today it is the fifth-largest company on the S&P 500, with a market capitalization of $932 billion.

Tesla currently has a market capitalization of $603 billion, exceeding those of Toyota, Volkswagen, Daimler and General Motors combined. The company listed in 2010 with a market capitalization of $1.8 billion.

Uber had its beginnings in an apartment in 2009 and, within just seven years, was booking more rides than the entire US Taxi industry.

10 years ago, Amazon’s Alexa and Apple’s Siri were just a pair of pretty names. Now, close to 50% of US internet users use a voice assistant at least once a month.

Fast forward to the current decade. Graeme Codrington – author, futurist and founder of strategic insight firm, TomorrowToday – predicts that, when we look back at 2020/2021 from a 2030 perspective, the COVID-19 pandemic itself won’t even feature among the top five of most disruptive things we will have experienced over the ensuing decade. Nonetheless, the pandemic has accelerated the adoption and implementation of many technologies that would otherwise have taken years, if not decades, to become mainstream. What this means is that the 2020s will turn out to be one of the most remarkable decades of change that we are likely to experience in our lifetimes. While we may think that a lot has happened over the last decade, we’re in for some surprises because the changes over the next decade will, to some extent, reshape the future of everything.

A lot of the stock market leaders in 2030 could very possibly be companies that are not even listed today – perhaps not yet in existence, or still unknown and flying under the radar. Of course, there may also be cases where the opposite can happen over the next decade. Cellular phones, for example, changed the world when they first arrived in the 1980s, but not all cellular phone companies kept up with the changing world and Nokia and Blackberry spring to mind here. When Apple’s first iPhone came out in 2007, many experts and analysts said that there was no chance that the iPhone was going to achieve any significant market share. In the words of one Bloomberg analyst, “The iPhone's impact will be minimal. It will only appeal to a few gadget freaks. Nokia and Motorola haven't a care in the world.” The share price movements of these four companies, however, tell the story of how things have played out since then, and Apple is now worth $2.11 trillion, making it the most valuable company in the world.

Source: Bloomberg

Two technologies I want to mention are those of electric vehicles and self-driving vehicles. We’ve known for a while that both these technologies have progressed beyond being mere pipe dreams and that they are already here. These two disruptors are also no longer seen in isolation and we are looking at the advent of electric, self-driving vehicles. According to Whitney Tilson, a former US Fund Manager, the convergence of these two technologies will change the world as we know it.

Electric vehicles will soon compete and even become cheaper than traditional vehicles, 90% cheaper to maintain and will last 5 times longer. Soon, then, the only vehicle that will make economic sense to own will be an electric one.

Self-driving vehicles are also already in use in some states in America. While it took 10 years for self-driving cars to rack up 10 million miles on public roads, the next 10 million miles took just a single year and this exponential growth rate will only continue.

It’s not just car manufacturers that are focusing on this technology. Amazon recently spent $1.2 billion to purchase the self-driving vehicle company, Zoox, and Apple expects to have its first electric vehicle on the road in the near future. In China, meanwhile, the number one producer of electric vehicles, more than 400 companies are working on electric cars.

This new way of transport will therefore not only become cheaper, more effective, and “greener”, but it will have a huge impact on many other industries, such as the medical, insurance and oil industries, to name just a few.

This could, potentially, lead to the biggest “medical” breakthrough in history, even though there is no direct connection with medical equipment or medication. Just think of the number of lives that will be saved and the injuries that will be prevented. 95% of vehicle accidents today occur due to human error, but self-driving technology means that fatal car accidents and other collisions will largely fall away. This, in turn, will cause a different kind of disruption, putting a lot of pressure on insurers because car insurance, to a large extent, will no longer be necessary.

Oil companies also know that if they do not adapt their business models and start focusing on alternative energies, they no longer will have a right to exist. The French oil group, Total, for example, has already come a long way regarding this transformation. As reflected in the group’s recent name change to TotalEnergies, most of their focus, going forward, will be on renewable energy resources.

Even though the world is changing, from a technology point of view, faster than we could ever have imagined, it is certainly still necessary to be very careful before investing in any of the new-generation companies, as well as in other popular investment themes. For example, there are listed, new generation companies that are growing, but that are trading at PE multiples that simply don’t make sense. While it’s true that some of these next-generation companies currently trading on 100 + PE ratios could grow into their valuation over time, one must be wary of giving these companies too much credit upfront.

The matter of cryptocurrencies also comes to mind. Although one can argue that much has changed since previous asset bubbles - and we can look all the way back to the 1700s for examples, such as Tulip Mania - it seems that not much has changed when it comes to group psychology and the way we invest, and this mindset, more often than not, ends badly.

Bearing in mind how quickly the world is changing, as well as the fact that we all want to jump on the bandwagon when it comes to certain popular investment ideas and themes, we have to remain vigilant where fundamental valuations seem to matter less and where prices are simply a function of investor sentiment.

A great company with good growth prospects isn’t necessarily a great investment. Examples of this are the share price movements of Microsoft and Walmart from 2000 to 2010. Both these companies had very strong earnings growth as well as good dividends and share buybacks. Indeed, Microsoft’s earnings almost tripled while their revenue doubled over this period. Both Microsoft and Walmart’s share prices, however, performed poorly over that decade, with Microsoft's share prices literally halving in value and Walmart also giving negative returns. Both these companies were, therefore, completely overvalued in 2000.

It remains important, no matter how fast the world is changing, not to get carried away with some of these popular investment themes and to remember that the price you pay for an asset today really does matter and will still largely determine the growth it can achieve over the longer term.

In one of our February newsletters (on Technology and the 4th Industrial Revolution), our colleague, Franske Neiteler, referred to, among other things, opportunities in new generation technology stocks. It might be well worth your while to go back and re-read his advice.

Sources: www.graemecodrington.com, Bloomberg, www.empirefinancialresearch.com, JPMorgan Research.

The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG and do not constitute advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for actions taken on information in this newsletter.
PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.

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Disruptors and those who will be disrupted