Whenever new technology appears, investors immediately try to predict the effect it will have on existing businesses: which companies or industries stand to benefit, and which will see their business models disrupted?
A company perceived to have a high potential for disruption by new technologies can see its stock drop precipitously even if there’s no current evidence of disruption. Just the possibility is enough to make investors sell.
Currently, investors are anticipating disruption from three major sources: AI, stablecoins and tokenization. But not all of these disruption fears are evidence-based or equally rational.
Unfortunately, without evidence in hand and only rampant forecasting, all stocks at risk get sold. The underperformance that results from such concerns could represent an opportunity for value, contrarian investors.
Disruption from AI
Based on the disruptions we are already seeing from AI, investors are extrapolating the worst-case scenarios and divesting of industries and companies where there’s concern for the core business model.
Affected stocks include Intuit, ServiceNow, Adobe, HubSpot and Salesforce, all of which have underperformed, with some now trading at relatively low valuations.
In particular, many investors believe that AI will negate the need for specialized software such as tax preparation software (Intuit’s TurboTax) or orchestration software for enterprises (ServiceNow). Despite the fact that these companies are incorporating AI into their products, investors are skeptical and have rotated out of these names.
For some of these companies, the actual risk is likely overblown, at least in the intermediate term. And there’s lots of evidence of AI being an enabler for them. As these stocks fall, the risk-return proposition is becoming more attractive.
Fears of disruption from stablecoins
There’s not much evidence yet that stablecoins or tokenization are actually disrupting industries, but investors are projecting the likely disruption of AI onto other emerging technologies that might not turn out to be as disruptive — and that’s enough to affect prices.
With stablecoins, in the most extreme scenario, consumers will be able to pay for everything instantly with a stablecoin wallet, and therefore no one will need payment processors, card issuers or networks. This means the entire payments ecosystem currently required for you to pay for gas at the gas station disappears or is simplified greatly.
At least, that’s what some people are envisioning, as it’s not actually happening yet. But payments companies like Visa and Mastercard have already seen their share price fall.
Companies that are expected to benefit from stablecoins, like Circle or Tether, have done very well, and those that are expected to be disrupted have not done well, even though there’s currently no evidence of disruption.
It could happen, but it’s far from certain, and if anxiety wears off before this possible future comes to pass, stock prices in the legacy payments sector could be positioned to rise.
Tokenization and derivatives
Companies that run derivatives exchanges, like Intercontinental Exchange, are also feeling the heat. The idea behind tokenization is that you can transact any illiquid asset such as real estate or valuable artwork in a token.
These can then be traded easily by anyone or sold in fractional increments. Recently there’s been a push to tokenize financial assets: money markets, futures contracts, stocks and so on.
As it stands, owning a token tied to a physical asset does not mean you actually own it. It’s meant to be a proxy of the asset without ownership.
The goal is to eventually be able to trade the actual asset using tokens. This would simplify the current complicated and confusing landscape for transacting in tangible assets, eliminating the need for the derivative contracts ecosystem, for example.
As Intercontinental Exchange dominates these markets globally, it has become a prime target for investors who believe its business model is at risk. The company isn’t standing still, however, and has been testing and incorporating tokenization into its services in hopes of streamlining its own operations.
When faced with new technologies, investors’ imaginations can get ahead of reality, prompting them to anticipate near-term disruption. This will cause them to sell any companies that seem to be at risk, even if currently there’s very little evidence this is happening.
In the meantime, these stocks can trade at appealing valuations and, if the worst-case scenarios don’t materialize, could deliver significant outperformance.
Rosa Y. C. Chen is director of research and a portfolio manager at Hartford-based registered investment advisor Bradley, Foster & Sargent.
