“Disruptive innovation” can conjure up images of flying cars, lightsabers, or a brave new world. But these technologies may not be as far off as they seem.
Tech companies are using disruptive technologies like artificial intelligence to analyze large, complex datasets. Research and development in the healthcare industry has created lifesaving drug therapies and treatments. And climate change is forcing energy and utilities companies to focus on renewable energy.
Investing in such disruptive innovation can be tricky, says Dave Sekera, Morningstar's chief U.S. market strategist.
“Because disruptive technology is such a broad, wide-reaching concept, it is difficult to identify companies that fall within the group,” he says.
The Morningstar Exponential Technologies Index holds about 200 stocks that Morningstar analysts expect to experience significant economic benefits from using or producing a new technology. The companies covered in this index touch on any combination of nine themes: big data and analytics, cloud computing, energy transition, financial technology innovation, healthcare innovation, hyperconnectivity, nanotechnology, next-generation transportation, and robotics. (Explore more about each theme in the index's rulebook.)
But which of these companies, representing these nine emerging themes, have the competitive advantages and management teams to thrive?
Here are the 19 companies in the Morningstar Exponential Technologies Index that also made our Best Companies to Own list in 2023.
Let's take a closer look at what Morningstar thinks of Analog Devices ADI, which is exposed to four of the nine themes, tied for the most with Texas Instruments TXN among the companies on our Best Innovative Companies to Own list.
Themes: Nanotechnology, hyperconnectivity, robotics, and next-generation transportation.
“Analog Devices is one of the world's largest analog chipmakers, with an especially strong position in analog signal processing chips. We think it is well positioned to profit from more advanced and higher-priced semiconductor content in automobiles, 5G wireless networking equipment, and industrial applications like medical devices and factory automation equipment in the years ahead.
“Analog chips are used to convert real-world signals, such as sound, temperature, and pressure, into digital signals that can be processed. We believe Analog Devices has a wide Morningstar Economic Moat Rating because of its proprietary analog designs and high customer switching costs; since analog chips are neither particularly expensive nor do they require cutting-edge manufacturing techniques, high-quality analog chipmakers tend to retain design wins as long as the end product is being built, all while maintaining healthy pricing and strong profitability over time.
“Most of Analog Devices’ organic sales come from data converters and amplifiers used in various end markets, such as wireless base stations, and the company expanded into power management chips via its acquisitions of Linear Technology and Maxim Integrated.
“An especially promising end market for the firm continues to be the automotive sector. Semiconductors are required to enable the sensors, active safety systems, and advanced infotainment systems added to cars today. Electric vehicles have even more chip content per car, and Analog Devices is well positioned, with a market share lead in battery management systems for electric vehicles. We’re also seeing a similar trend of increased chip content in industrial applications like robots, factory equipment, and medical devices. Analog Devices has tens of thousands of customers in these end markets. Further, its signal chain semiconductors will likely be prominently used in 5G wireless network equipment.
“Nonetheless, Analog Devices still faces competition in a fragmented analog market against companies with comparable chip design expertise. Further, the analog chip industry remains quite cyclical, and sales probably will continue to ebb and flow with these industry cycles over time.”
—Brian Colello, director of technology equity research for Morningstar
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