Improvements in technology and efficiencies in changing the way we do business can provide investors with an opportunity to generate some alpha.
Electric vehicle manufacturer Tesla Motors and professional networking site LinkedIn have delivered the goods over the past two years.
Investors have pushed Tesla’s share price from the mid-$US30 per share to close to $US200 this year alone, even though the company has yet to generate a full-year profit. While the share price has slipped from highs to be at $US147.47 today, investors are still happy to pay a high price for what are still relatively uncertain future cash flows.
Tesla’s offering will only gain in popularity as consumers continue to become more environmentally conscious and the firm installs more charging stations. Expectations of price deflation of key inputs will theoretically lower the final price as well.
Tesla is tipped to unveil a more affordable car in 2015 appealing to a larger market.
There are many brilliant ideas like Tesla that would deliver an improvement to the environment or the way we do things, but costs often outweigh the revenue in early stages and making it to mass-scale production is a difficult mission. But for investors, if the company can even offer the prospect of profitability, the rewards can be staggering.
Beyond being a professional networking platform, LinkedIn seized an opportunity to change the lucrative recruitment market. By leveraging its existing platform, LinkedIn’s hiring solutions offering now accounts for half of total revenue and has reshaped the job search market.
Through innovation LinkedIn has challenged the existing business models of recruitment and found itself a profitable segment in a market where it has the dominant market share.
Since LinkedIn (green line) listed in May 2011, it has climbed 414 per cent higher against a gain of only 32 per cent for the S&P 500 (white line). Over the same time, Tesla (yellow line) has gained 459 per cent.
For Australian investors, the investment pool for technological advanced companies or those with a platform to change an industry is significantly smaller, largely forcing investors to look offshore for opportunities.
But Australia does have a few companies across biotech and genomics, which are gaining more interest and providing plenty of potential opportunities. The downside is the likely years of patiently waiting for a return and the risk along the way.
Searching for the next technological revolution or company to change an industry could be the train to investment riches over a considerable time frame. Worst case scenario is a complete loss of capital. On the other side there is potential for staggering returns, more than rewarding investors for the risk taken along the way.