Are Disruptive Technologies the Next Dot-com Bubble?
Should I be investing in disruptive technologies today?
Are disruptive technologies the new and improved version of the 1990s dot-com stocks? The short answer is no, but there are certainly some similarities building.
ARK Innovation ETF (ARKK), an icon of thematic investing, is probably the highest-profile example of investing in disruptive technology. Even after sliding since its February highs, the stock remains almost double where it traded a year ago and triple from two years ago. Here, you can see how the returns of this single fund compare with the returns of the Morningstar U.S. Technology Index in the era of the dot-com bubble.
While speculative excess in the market has driven many of these stocks far beyond our fair value estimates, there are still several stocks we think are attractive for long-term investors.
The term disruptive technology is wide-ranging, but the key tenets are that:
The 1990s dot-com boom was fueled by singular focus on the advent of the Internet and its possibilities. Many of the Internet stocks were hardly more than a grandiose idea with little in the way of a business proposal--much less a plan to profitability.
Today, instead of being limited to a narrow scope on the Internet, companies focused on disruptive technologies are spread throughout the entire economy and are targeting new ways to revolutionize numerous industries and sectors. While many of these companies are still within their early-stage development and product monetization, they generally have a greater focus on achieving near-term profitability than the dot-com stocks did.
A lot of it has been driven by the coronavirus pandemic, which hasn’t so much formulated a new way of life as it has accelerated many economic and social trends which were already in place.
For example, shutdowns and social distancing drove rapid acceptance of working from home, online education, and e-commerce. Among other advances, the healthcare community employed big data analysis to model the progression of the virus and utilized new technologies to develop, test, and roll out vaccines in record time.
Consider: Teladoc Health (TDOC) is a virtual health provider that serves patients across all communication mediums; Palantir (PLTR) allows clients to manage and analyze large, disparate data sets; and in support of the work-from-home environment, DocuSign (DOCU) enables users to automate and provide legally binding contracts from any device.
Morningstar’s equity research analysts review each of their companies to identify those that not only may be a direct developer of key technological advancements, but also those companies that stand to be indirect beneficiaries. Those companies are then reviewed to determine which will derive additional economic earnings growth from heightened revenue growth, greater cost savings, and/or enhanced productivity.
We have broken down disruptive technology’s key themes into nine different classifications:
This is the first in a two-part series on disruptive technologies. In our next article, we’ll detail how to invest in these companies.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.