The Top 5 Disruptive Technologies of 2014

An Investor's Guide to Disruptive Innovation

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For technology investors, one of the most important things to consider is disruptive innovations in the market. These are trends that will create entirely new industries and, in most cases, displace others in the process.

On its own, innovation is not enough to be considered disruptive – there needs to be a cost benefit before any new technology can have a significant impact. Only when the value of a technology surpasses the value of a competing market does it officially become what we can call a disruptive trend.

One good example of a disruptive trend is the Ford Model T. Prior to mass production, automobiles were not yet a disruptive innovation due to their high cost. However, when the lower-priced Model T came rolling off assembly lines in 1908, the market for horse-drawn carriages dwindled, and the market for automobiles took off.

Understanding disruptive trends is a critical component of technology investing, as they will often indicate the winning and losing players in this space. Below, you'll find what we believe to be the top 5 trends of 2014 that are either approaching or just hitting this point of disruption.

1) Additive Manufacturing

More commonly known as 3D printing, additive manufacturing is the process of building three-dimensional objects with machines using computer-aided design (CAD) software.

3D printing allows manufacturers to make a product from the core up. In many cases this results in less waste, faster output, and lower operational costs. As the technology continues to mature, the ROI for 3D printers will continue to rise and entice an increasing number of manufacturers to buy in.

There are countless companies using 3D printing for a wide array of applications. Innovators have built working firearms, human tissue, prosthetics, musical instruments, clothing, and even electric generators with 3D printing techniques.

In the automotive industry, General Motors (NYSE:GM) and Ford (NYSE:F) are using 3D printers to build prototypes. In the aerospace industry, NASA, General Electric (NYSE:GE), and Rolls Royce are printing out parts for rocket and jet engines. Meanwhile, Boeing (NYSE:BA) is aiming to build airplane wings with additive manufacturing.

Perhaps even more important than what 3D printing can build is what it can destroy. Remember what digital formatting and piracy did to CD sales? 3D printing may just have a similar effect on physical goods. In fact, by 2018, an estimated $100 billion per year will be lost in intellectual property as a result of counterfeit goods made with 3D printers.

3D printing is currently a $2 billion industry growing at a CAGR of about 30%. Total revenue for the sector is expected to reach $6.5 billion by 2019 according to Wohlers Associates.

Currently, there is a ton of hype surrounding 3D printing, and while it certainly qualifies as a disruptive innovation, expectations for some 3D printing companies are likely inflated. Investors need to be cautious in this space.

2) The Automated World

Possibly the widest-reaching trend on this list, automation will soon touch nearly every aspect of our daily lives. From production lines to transport to the food on our plates, robots and computer algorithms will soon be working behind the scenes.

You may have heard about Google's self-driving car, which has driven hundreds of thousands of miles on public roads and has yet to cause an accident. Or maybe you've heard of Narrative Science, the company that's developed the automated author. We're talking about an artificial intelligence platform that can actually write its own financial articles and reports.

The fact is that while automated technology has already begun to creep into our daily lives, what we see today is nothing compared to what the future holds. The level of automation that comes in the next 10-30 years will bring a massive wave of both economic destruction and prosperity.

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Gartner analysts recently made some ominous predictions regarding labor disruption due to automation. The group predicts that while most management jobs will stay in tact, many middle-class workers will be replaced at an increasing rate over the next decade. By 2030, Gartner even expects the world's first human-free enterprise – a business governed entirely by computer software.

Now, becoming obsolete is certainly frightening, but the automation of current jobs does not necessarily mean higher unemployment. Just as the industrial revolution eventually created a wide array of new employment opportunities, an automated world may have similar effects.

Key areas to benefit from this trend will include automated retail, advanced robotics, and artificial intelligence. Investors will specifically want to look for the companies taking advantage of this technology, the companies providing it, and finally the supply chains that support it all.

3) The Internet of Things

The Internet of Things refers to the concept of everyday objects becoming connected to the web. While this premise is a uniquely disruptive trend, it's also intrinsically tied with the automated world described above.

Let's say you're heading to the grocery store after a long day at work. You can't seem to remember what's in your fridge, so you pull up an app on your phone. The app connects to your refrigerator that contains embedded sensors. It then tells you what to buy based on which items are left in your fridge and which will expire soon – it even lets you know how many eggs are left in the carton.

This idea of connected devices will expand well beyond your fridge. In the winter, you'll be able to warm up your car and monitor the interior temperature from virtually anywhere on earth. In the summer, your thermostat will connect to the grid and turn down the cooling during peak hours to reduce your energy bill.

Further applications for the Internet of Things may include, but are not limited to:

  • Emergency response
  • Intelligent retail
  • Agricultural management
  • Waste management
  • Continuous care
  • Traffic reduction/vehicle-to-vehicle communication

There are several ways to play this emerging trend. One strategy is to seek out companies supporting this network. The most prominent example right now would be Cisco Systems (CSCO), which has launched an entire division focused on the Internet of Things. Another angle is to pin down companies providing the intelligent sensors that will be crucial for these devices.

4) Next Generation Interface

There are few guaranteed trends in consumer hardware, but one thing is for certain: devices will continue to become increasingly portable. In the past, this primarily meant creating smaller computer chips and batteries. Today, however, devices are becoming so small that we now need alternative ways to interact with them.

Over the next decade, we will see a new generation of devices, primarily in the form of wearable and embedded computers. To support the placement and size of these devices, non-touch interface methods will need to be adopted. Among these methods are voice control and spacial gestures: two forms of biometric recognition.

Voice control will still come in the form of programs similar to Apple's Siri but with advanced artificial intelligence and a greater range of applications. Today, you can ask your iPhone where the nearest gas station is – in 10 years you'll be having a full blown conversation.

Add gesture recognition to the mix, and we will eventually eliminate the need for keyboards and touch screens altogether. There are already devices on the market like Microsoft's Kinect that track your limbs, fingers, and even facial expressions. This technology allows us interact with and manipulate objects in a virtual world, much in the way Tom Cruise does in the movie Minority Report.

It's worth nothing that the input on these devices isn't perfectly accurate just yet, and the cameras are still too cumbersome to fit in wearable devices. But there is little doubt that these technologies will reach practicality for wearable devices within the next 5-10 years. When this happens, it will completely disrupt the mobile device industry as we know it.

5) Next-Generation Genomics

Just two decades ago, the Human Genome Project was among the most ambitious research projects in science. It took the National Human Genome Research Institute (NHGRI) billions of dollars, thousands of researchers, and nearly 15 years to complete the task. Today, we can map an individual's genome in a matter of hours, with a single machine, and for less than $10,000.

Genomes essentially work as blueprints for the human body. In combination with the surrounding environment, they determine the people we will become, as well as the diseases we'll inherit. By reading these blueprints, doctors aim to better understand the medical needs of individuals and also to design innovative and highly effective treatments for disease.

According to the NHGRI, there are currently over 350 biotechnology products in clinical trials, many of which are based on genetic sequencing. These products offer the promise of both individualized treatment and preventative care. The ultimate goal is to detect a disease before it even emerges and stop it at the source.

It's estimated that in the next 10-15 years, this will become a common reality. Instead of your doctor prescribing medicine based solely on your symptoms, he will determine the best course of action based on your genetic code.

Though we have the blueprints right now, the problem still lies in sorting and interpreting all this data. While there will be ample opportunities in small the biotechnology sector, there are also plays in big data and analytics. Look to companies like Pacific Biosciences of California (NASDAQ: PACB) to benefit from this trend.


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