Innovation Disrupt… Or Be Disrupted
Around 5,000 years ago (2.5 times as far back as Rome), humanity first domesticated the horse. This new invention impacted economics, travel, and military to such a degree that population trends across three continents forever changed. The domestication of the horse was a disruptive technology that completely replaced the earlier way of doing things. The horse then remained dominant throughout human history including the founding of the United States, lasting until Henry Ford revolutionized the automobile industry in 1908 with the Model T. At that point, the previous disruptor became the disrupted and the cycle repeated. At Equitas, we never say “We’ve always done it this way.” That is one of the most dangerous sentences, and we are always keeping watch for newer and better ways of doing things. At present, we are in the midst of similar disruptive moments across several industries.
Times are always changing, and the rate of change in several industries has never been faster than the present. Speaking of the horse, the personal transportation industry is an industry currently in the crosshairs of a disruptive moment. ARK Investment Management, an investment research firm focused solely on innovation and disruption, estimates that $8 trillion of US public equity value is at risk.
The biggest chunk of the value at risk lies within the energy industry, as some researchers predict a 40% decline in oil demand by 2030. If battery system cost declines continue at the current rate, electric vehicles could be cheaper than their gas guzzling counterparts in the next five years. Concurrently, autonomous driving systems powered by AI could boost utilizations while also lowering costs. ARK estimates that the cost of self-driving taxis could fall below traditional car ownership landing at a cost of just $0.25/mile.
With the cost of taxi service dropping dramatically, fewer buyers will be willing to pony up the purchase price (including financing) which will impact dealerships. These robot drivers never take their “eyes” off the road either, so they’re typically safer drivers (estimated 80% fewer accidents) which impacts the insurance industry. The key to this industry is the AI driver, which improves according the amount of training data that it has access to. This barrier has the potential to lead to a winner-take-most industry, leading to consolidation. These large-scale changes are coming likely sooner than most think, and some argue is not being accurately reflected by current market valuations. Autonomous driving has been tested for years now in Phoenix. The biggest complaint by the human drivers is that the cars stop for yellow lights! Autonomous taxis mean sprawling parking lots will not be needed and can become beautiful parks.
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The freight rail industry as a sub-sector of transportation is similarly under threat of disruption. Over the next decade, experts predict the cost of trucking to fall from $0.12 per ton-mile to 3 cents, falling below the cost of rail which previously had been gaining market share. The freight rail industry accounts for 12.5% of the S&P 500 today and represents over $750 billion in total public enterprise value.
The traditional TV market is currently being disrupted by on demand entertainment like Netflix NFLX . Network TV’s capitalization is estimated at $300B for subscriptions and another $135B in advertising revenue totaling $442B in market value at risk. A Netflix subscriber enjoys a cost advantage per hour of entertainment of 1/3rd that of traditional TV and that savings continues to lead consumers to cut the cord. The key disruptive moment comes when adoption begins to hit mass market.
Retail to E-Commerce
Brick and Mortar Retail is losing to online sales in another disruptive market. US e-commerce gained from 11.3% of retail sales at the end of 2019 to 16.1% by the second quarter of 2020, the largest quarterly jump in history. The retail market plus associated real estate loans totals over $6 trillion at risk.
Brick and Mortar Banks with $260 billion in fixed assets have few options vs mobile banking companies like Venmo or Cash App who increased their monthly active users by 32 and 30 million respectively in the last four years. Globally, China has already surpassed the USA in e-commerce and e-cash payment usage.
The global healthcare market, over $8.5T, is at risk on a few fronts. Brick and mortal services are under threat from telemedicine, which allows patients to skip a trip to the doctor’s office and receive a clinical diagnosis via mobile phone or video chat. According to Edward Yoon, health sector leader for Fidelity Investments, “While many of these new health care delivery models are early in their rollout, as they scale nationally it will fundamentally realign the incentives for providers and payers. Importantly, this could create a meaningfully improved consumer experience and be done at lower costs.” Prior to the pandemic, Business Wire estimated telemedicine at a 19% annualized growth rate through 2022 which has increased.
Gene editing had its first mass market use in COVID vaccine. CRISPR Therapeutics alone grew their total revenue from $3 million in 2018 to over $289 million in 2019.
Technology upgrade cycles are showing signs of mini disruptive patterns. Since the 1980’s a new generation of wireless data disseminates every 10 years. In 2019, the world started the upgrade to 5G, which allows speeds up to 10 gigabits per second. The technology is expected to usher in the Internet of Things with widespread connectivity between devices. Verizon VZ alone is spending $17 billion a year to accelerate their transition to 5G. That much data processing will require cloud computing. The global cloud computing market size was valued at USD 266.0 billion in 2019 and is expected to expand at a Compound Annual Growth Rate (CAGR) of 14.9% from 2020 to 2027.
The automation trend is big, broad, and fast-growing. In the field of factory automation alone, the total addressable market globally was about $160 billion in 2018. That market is expected to grow at a compound annual growth rate (CAGR) through the next 5 to 10 years.
Innovation brings on disruptive technologies and disruptive investments can change the world quickly, which means they come with some volatility. The best managers find great companies in industries that are already growing rapidly and will continue growing far into the foreseeable future. This type of growth typically does not come in a straight line. Cathie Wood in a recent video interview told investors that she expects a correction and warns investors to “take a bit of money off the table and keep some powder dry.” Innovation may have several risks, but the biggest risk may be “we’ve always done it this way” never changing and falling behind.
The exponential growth of the current mega-trend may turn out to dwarf the innovation of the last big technological innovation period which was the industrial revolution. At that time the new fanged innovations were electricity, telephones, light bulbs, and the internal combustion engine. The incandescent light bulb is being disrupted by LED lighting sources. Land line telephones have been disrupted by cellular. The internal combustion engine is beginning to be disrupted by more efficient electric engines.
This technological innovation revolution looks to be the driving force for years to come. We find it unwise to bet against mega-trends. The technological revolution benefits significantly since it gets to stand on the shoulders of the industrial revolution and take innovation to new heights.
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