Investing at the Pace of Disruption - 7investing

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Investing at the Pace of Disruption

Disruptive innovation is one of the most powerful concepts in investing. And it's taking place even faster in today's digital world.

March 15, 2021

– Advisor: Simon Erickson

Industries: Financial Services  

“The future is already here – it’s just not evenly distributed.”

– William Gibson

Disruptive innovation describes when changes in technology introduce an entirely new value proposition for customers.

This often means bad news for the industry incumbents. Disruption can flip the script on entire markets, lighting their profit streams on fire and displacing their dominant market shares.

That “new value proposition” also means customers now have access to something entirely different than before. Amazon’s e-commerce marketplace disrupted retailers, giving consumers a way to shop and have goods delivered at home. Amazon Kindle disrupted bookstores, giving readers a way to directly download and read books from the couch. Amazon Web Services disrupted on-premise datacenters, giving IT folk flexible storage and computing power to meet their needs. Jeff Bezos may be a legend for investors. But he’s significantly less popular at the companies he’s put out of business.

And while the theory of disruption was first pioneered by Clayton Christensen more than two decades ago, today’s digital era is allowing it to take shape more quickly than ever before.

Here are a few markets where we are aggressively seeing disruption:

  • Plug-in electric vehicle sales have increased sixfold in five years, from 500,000 units in 2015 to more than 3 million in 2020. EVs still represent less than 3% of global total vehicle sales, though many analysts predict they will account for more 11% by 2025 and more than 80% by 2050.
  • The number of American households paying for cable television has fallen by 20 million in five years, and they’re quickly replacing cable with digital streaming. Disney+ has already attracted more than 100 million global subscribers, just 18 months after its initial launch.
  • Immunotherapies are a new wave of drugs that train the body’s own immune system to fight cancerous tumors, rather than being exposed to chemotherapy.  The global market for cancer immunotherapy drugs has nearly doubled in two years, from $58 billion in 2018 to $107 billion in 2020.

It hardly ends there. We’re just getting started with non-fungible tokens disrupting the music industry, quantum computing disrupting digital encryption, and blockchains disrupting…well…just about everything.

These are the golden years for innovative CEOs with a chip on their shoulder. They now have digital technologies at their fingertips, and can spin up disruptive solutions quickly and cheaper to displace those industry incumbents.

This brings with it a new era of opportunities and threats for investors. New markets are forming that could be worth hundreds of billions of dollars, though “competitive advantage” are getting more difficult to sustain.

I’ll be attending the SXSW conference online this week, keeping an eye out for disruptive themes (I’ll also share my notes with subscribers). Just as Intel CEO Andy Grove said about Christensen’s The Innovator’s Dilemma back in 1997, the very idea of disruption for business leaders is “lucid, analytical — and scary.”