Disruptive Tech Stocks: How to Invest and Beat Apple and Tesla
- UBS highlighted disruptive tech investing opportunities in its latest research report.
- The Swiss bank pointed to four sectors that could see revenues grow by 16% over the next five years.
- Investors should focus on finding ‘the next big thing’ rather than investing in Big Tech, according to UBS.
Technology stocks haven’t been immune from the latest stock market downturn. Last week, the tech-heavy Nasdaq fell by just under 4%, and shares in Cathie Wood’s disruptive technology focussed Ark Innovation ETF plummeted by 13%.
That followed negative headlines about the S&P 50 0’s largest company by market capitalization, as Apple informed its suppliers that iPhone 13 demand has slowed, according to Bloomberg.
UBS is still backing tech investing as a viable strategy – but it now prefers small- and mid-cap disruptive tech stocks to Big Tech giants like Apple and Tesla.
“This setback doesn’t necessarily signal a broader slowdown for the tech sector, and we see areas of strength,” the Swiss bank’s chief investment officer Mark Haefele said in a recent research note. “Investors should not lose sight of other significant tech sector investments and growth to come in 2022 and beyond.”
UBS is the world’s largest wealth manager, with $2.6 trillion worth of assets, according to the SEC. It has previously positioned disruptive tech as a viable alternative to investing in cryptocurrencies.
Haefele ‘s team acknowledged that investing in mega-cap tech stocks offers some exposure to disruptive technologies, but argued that current high valuations mean investors should look for smaller names that have more potential for growth.
“We have continued to see strength in tech mega-cap names,” UBS analysts said. “But entering 2022, valuations are around 30x forward P/E with low-teens expected earnings growth, and larger tech firms remain exposed to regulatory risks.”
“Plugging into growth drivers will require investors to look beyond just mega-cap tech stocks and focus on mid-cap names that could prove to be ‘the next big thing’,” they added.
Haefele’s team argued there are three main reasons to invest in small- and mid-cap tech stocks instead of blue-chip names like Apple and Tesla. They said these smaller companies post faster earnings growth, receive lower levels of regulatory scrutiny, and are more likely to benefit from mergers and consolidations.
Insider breaks down the four disruptive technologies that UBS is watching right now.
UBS positioned three innovations – AI, big data, and cybersecurity – as the new “ABCs of technology”. Analysts expect the total revenue associated with these three themes to surge from $386 billion in 2020 to $625 billion in 2025.
AI will post the strongest returns of the ABC technologies, according to UBS. They said the services and hardware market alone will grow 20% a year to reach $90 billion within the next five years.
“AI is already widely used in areas such as navigation, pricing, advertising, facial recognition, and translation,” Haefele’s team said. “In the years to come, we believe companies will increasingly turn to AI to improve customer experiences, reduce the cost of providing products and services, and develop new business lines.”
Big data will also surge over the next decade, according to UBS. The bank estimated the global data universe will expand tenfold in that time, reaching 660 zettabytes in total.
“It has become commonplace to say that data is the new oil, and we are surrounded by this digital commodity,” analysts said. “But just like oil, data needs to be refined before it can be put to use to automate business processes, boost efficiencies, or improve the quality of strategic decision-making.”
Cybersecurity represents another promising disruptive tech investing opportunity, UBS said. This year, almost 330 million people were victims of cybercrime.
“Shifting to cloud computing has cut company costs significantly, but it has increased the potential impact of an online attack,” Haefele’s team said. “We expect the cybersecurity industry to grow by an average of 10% between 2020 and 2025 thanks to steadily higher enterprise IT spending and the stronger adoption of cloud security.”
5G is the final innovation that UBS highlighted in its latest report. The bank believes this technology will be 20 times faster than 4G, facilitating disruptors including driverless cars and the VR-powered metaverse.
“5G technology… will bolster the impact of the ABC technologies, enabling various applications that were not feasible before,” UBS analysts said. “We see opportunity in 5G enablers and platform beneficiaries, and estimate a mid-teens earnings growth potential over three years.”