Are Disruptive Technologies Too Expensive, Or Just Getting Started?
This year socially responsible investments and green technology stocks have seen incredible returns. Some of the names are hyped up, bubbly, and valued as dreams more than as companies with real products. But the idea behind the run in stock prices is sound. Green technology, autonomous solutions, natural foods, clean power, these are the kinds of disruptive companies that are changing the investment landscape.
Some of the moves in disruptor names are hype, but some of the moves are justified. Many green technology sectors are hitting crucial points, pivoting from being hypothetical to realized technologies, or they’re seeing products finally become profitable. In some cases, consumer demand and social pressure have finally tipped the scales in the disruptor’s favor.
That doesn’t mean every green company is an investment, but this is a space you want to be in. Consider these three points.
First, there’s a lot of social pressure for disruption. Green energy, clean food, responsible companies, the portion of society interested in responsible investing is increasing and young generations care about these progressive concepts. As we look at the enormous wealth transfers that are going to happen over the next decade, with trillions of dollars transferring into the hands of Millennials, these social pressures are going to become investing pressures.
Second, the upcoming political transition. President Elect Biden is likely to support green initiatives, both through pushes to explicitly provide stimulus and through pushes to reduce subsidies for existing industries. Depending on how the Senate race resolves and how the parties get along over the next few years, there could be a significant amount of stimulus coming down the pipe for green technologies and infrastructure more generally.
Third, and perhaps most important, a lot of disruptive industries are hitting a pivotal point where their technologies are becoming economically viable or even becoming cheaper than incumbent technologies.
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Two great examples of this are clean power and electric vehicles. For a long time electric vehicles were hampered by short battery ranges and high costs. Buyers of an electric vehicle were buying a less efficient product at a higher price. Things are different today; costs of production are falling, consumer preferences have shifted, and the technology for battery range and battery charging have improved. In sum, electric vehicles are the future of the auto industry, and nearly all the 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 being the cheapest option when assessing new power projects. Combine the cost efficiencies with building social pressure and reputational risk for the utility companies, and you have a market that’s ripe for disruption.
How To Invest In The Space:
Investment in disruption is difficult. It’s hard to find reasonably priced opportunities with viable businesses. So, you have to do your homework, know what you own, and be careful about how much you put into any one idea. If it sounds too good to be true, it probably is.
You also shouldn’t shy away from buying bigger names or feel like you have to find the hidden gems to be successful. In fact, there are a lot of scenarios where buying bigger names or incumbent players could be a smart move. Yes, there are scenarios where an Amazon AMZN comes out and disrupts an entire retail industry, but far more often there are changes within an industry.
For example, look again at the automotive market. There are new entrants to the space and a handful of companies looking to disrupt various parts of the industry, but a large portion of the shift towards electric vehicles is coming from the incumbent players. GM, Toyota, Volkswagen, and others have all shifted their focus to become electric vehicle centric over the next few years.
Another good example would be in renewable energies. There are risky ways to try to be in the space, picking the next solar panel company or someone with a potential breakthrough battery pack. But it would be silly to ignore the largest players in the space – the utility companies like NextEra NEE who are installing new green power every day and have partnerships with existing utility companies across the country.
Similarly, you can look at the tech giants, companies like Alphabet who have research spanning biotechnologies to autonomous driving or Amazon who’s made significant investments in electric vehicles for its delivery fleet.
Sure, the incumbent players each face their own risks and you have to do your research anytime you’re looking to invest, but the point here is that there are a lot of different angles you can take when approaching a new space.
Innovation is a space you want to be in and the future is green. So yes, go out, get some disruptive companies in your portfolio. But don’t concentrate it too much, do your homework, and don’t feel like you have to swing for the fences to take advantage of the innovations in the world today.