As innovation continues to create new markets and challenge existing industries, Capital Group investment professionals share their insights on how disruptive technology can benefit investors in 2017.
Predictions many questioned from the movie “Back to the Future” came true in 2016, as the Cubs won the World Series and Nike began to offer self-lacing sneakers. Whether or not Nike’s power laces gain mainstream acceptance, the way we live and work is being enhanced by dramatic changes in technology.
Disruptive technologies are the result of new business models that are constantly innovating. Often their initial products or services appeal to only a small audience of customers. However, if they can evolve to offer higher quality at lower prices, they cause disruption by creating new markets and challenging existing industries.
“As investors, we need to understand not only the opportunities, but also the threats to incumbents,” notes Nick Grace, a Capital Group portfolio manager.
Cloud Computing Is Accelerating Disruptive Technologies
Cloud computing has been a hugely disruptive force over the past decade, driving innovation and, in turn, enabling new business models.
Many people have a hazy understanding of “the cloud” and whether it will keep their data secure. But most are already relying on cloud computing services when they use email, online banking and social media.
In reality, the cloud is a global network of massive facilities filled with hardware that runs software to store, manage and process data remotely. Cloud providers such as Amazon, Microsoft and Google now rent computing services over the internet. In fact, Amazon’s cloud-computing platform, Amazon Web Services (AWS), is the fastest-growing business in the history of technology services. AWS grew its revenue from $500 million in 2010 to nearly $5 billion in five years.
This innovation has allowed large companies to reduce or eliminate the cost of maintaining their own data centers. Cloud providers also benefit startups by reducing their need to buy technology so they can focus on product development.
Cloud-computing businesses will continue to have strong investment potential, particularly when they are able to dispel remaining security concerns by demonstrating they offer higher standards at lower costs than corporate departments. “I think people are likely to be surprised by the accelerated rate at which information technology (IT) needs move to the cloud over the next three years,” says Capital Group portfolio manager Mark Casey.
In addition to helping launch new businesses and changing existing practices, the cloud is disrupting companies that sell computer hardware and software. By sharing resources in the cloud, companies no longer need to own computing power that may sit idle or quickly become obsolete.
Machine Learning Is Creating Cures
Cloud computing is increasingly enabling computers to teach themselves by analyzing massive amounts of data from the web, smartphones and other internet-connected devices. Common “machine learning” applications include those that train computers to understand speech and recognize images. Smartphone virtual assistants now respond to questions, and social media can tag names to photos.
Advances in machine learning are having a profound impact on the medical world as well. An example is a smartphone app that can detect skin cancer. Three years ago the technology was 81% accurate. Today, the app is even more precise — roughly equal to the diagnostic skills of a dermatologist.
Gene sequencing perhaps provides an even greater example. It took 10 years and $1 billion to sequence the first human genome. Now the cost of sequencing DNA is $1,000 and can be done in a few days; soon it will cost as little as $500 and take just one day. Doctors may then be able to diagnose an illness by comparing a patient’s DNA to databases that have already identified factors that contribute to the disease.
Machine learning is also supporting the data analysis that has been integral in the development of new drugs. These treatments can be personalized to target the specific nature of a patient’s illness based on their DNA. “These advances allow us to imagine curing diseases, not just treating them,” says Capital Group investment analyst Rich Wolf.
Many pharmaceutical companies are now spending more money on developing therapies, benefiting equipment suppliers with the technology to do the necessary research. However, drug companies that underinvest in disruptive innovation may need to acquire competitors with a stronger pipeline of potential treatments.
Self-Driving Cars Hit the Road
Going mobile used to mean going on the road, not online. The two activities merged with the creation of app-enabled car services, which have upended the traditional taxi business model by swiftly matching riders with drivers based on proximity and need. The services offer clean, owner-operated vehicles and convenient pickup arrangements at competitive prices. And usually with little or no wait time, even during peak ridership hours. But what could be the most disruptive technology thus far looks to be just around the corner with the introduction of autonomous, or self-driving, vehicles.
Many cars are already equipped with cameras and sensors to help drivers avoid potential accidents. Now, competition is developing not only between traditional automakers such as GM and Toyota, but also among technology companies like Apple and Google as they seek to put self-driving cars on the street as early as 2020.
In just two years, machine learning has increased by 10 times the distance driverless vehicles can travel. “However, it will take more time to develop fully autonomous cars that can safely operate under all road and weather conditions,” says Capital Group investment analyst Kaitlyn Murphy.
It is still too early to predict who is most likely to benefit from the use of autonomous cars — manufacturers or operators. Uber’s profits could very likely increase with the cost of the driver eliminated.
In addition, car-sharing services like Zipcar could reduce or even eliminate the need to own a vehicle. This may reduce auto sales by more than a million units annually over the next decade.
Investing in Disruptive Technologies
It could be argued that the most disruptive technologies are perhaps the ones we never expected and couldn’t imagine. Capital Group takes a long-term view of innovations, using fundamental research and a worldwide network of investment professionals to identify and analyze such trends and their impact on industries and companies as they evolve.
“That global and long-term perspective is what gives us the edge in terms of identifying companies best positioned to take advantage of those innovations,” says Mark. “I’m excited about the ongoing potential for technology innovation to make a meaningful difference in the quality of peoples’ lives, as well as in the investment opportunities in businesses that either pioneer those changes or benefit from those changes.”