Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 554

Tomorrow’s innovation, today’s investment opportunity

As share prices in some of the world’s biggest technology companies challenge their own highs in early 2024, many investors could justifiably be asking themselves if pricing might be getting overly exuberant?

For the long-term investor however, they are perhaps asking themselves, ‘who has the runway for growth?’

As this century has shown, innovation continues to be a driving force for growing businesses and arguably, the culture of innovation especially cultivated by the technology sector in this first quarter of the 21st Century has some companies better equipped and energised to continue to grow.

An innovative company is one that could be described as consistently producing a unique product or service that is not easily replicated by other companies. It also has the ability to drive the product or service towards long-term business growth and profitability.

Unlike inventors, however, innovators are essentially businesses that take existing great ideas and convert them into great products. Apple’s late co-founder Steve Jobs once quoted Picasso with the saying “good artists copy, great artists steal”. Apple revolutionised the music industry with its hit product iPod, but the company didn’t create the first mobile music player. It was Sony’s Walkman that first changed the way we listen to music.

When music piracy and song file-sharing threatened the earnings of record labels, Steve Jobs convinced them to sell music singles through Apple’s iTunes store. This was a strategic, innovative move that became an instant hit with consumers who could download music legally for 99 cents per song, and displaced music retailers in the process.

Were patent rules broken along the way? Possibly in some instances as Apple paid out millions to settle patent lawsuits. But the company also holds numerous patents and generated billions in revenue from the music industry in the years that followed.

Figure 1: Innovation remains a critical driver for success today
Innovators have outperformed the market through consistent growth and value creation.

Past results are not a guarantee of future results. Source: May 2023, Most Innovative Companies 2023, BCG. Chart compares 50 Most Innovative Companies’ one-year total shareholder returns (TSR) for that year against MSCI World. Top 50 companies are reweighted annually to reflect changes to the list.

Innovation and AI

So, with the advent of artificial intelligence emerging and accelerating more recently, a reasonable question to ask is: will the innovators continue to grow and win?

While artificial intelligence isn’t new, what has changed is the advancement in computing power. Together with the huge database of the internet, today we are witnessing the phenomenal capabilities of smart artificial intelligence coming to bear.

ChatGPT is an example of smart AI. It exploded in popularity, reaching 100 million users in just two months, because of its ability to complete tasks that save time. Students were one of the earliest adopters as it’s a great learning tool.

In business, there is likely to be a dramatic change in the way we do things. The early adopters of AI will be the initial winners, and among them are the hardware providers that provide the picks and shovels. They include data centres and the producers of graphics processing units, both of which could see a ramp up in investments as the demand for AI technology grows. The speed of investment and adoption has the potential for faster returns, leaving the laggards to play catch-up.

Over time, the power of innovation, regardless of AI, will force the breakup of monopolies. In semiconductors, the rise of TSMC opened the doors for other companies to innovate and grow. In drug discovery, CDMOs2 and CROs2 enabled smaller biotech companies to thrive. The same will happen as AI advances and new competitors emerge. Despite all the competition, however, the ultimate beneficiary remains the consumers.

Innovation by geography

Taking the innovation theme concept a little further, it is also clear that the geography of innovation continues to evolve.

Countries like the US and China have established innovation ecosystems that are fuelling innovation catalysts and triggering world-changing innovation.

The ingredients of a successful innovation ecosystem are the 5 Cs: connectivity (online communications), capital (money to invest), courage (risk appetite to invest), concentration of expertise, and channels (exit channels like IPO or M&A).

The internet innovation that came out of the US had those 5Cs, while the innovations that happened in emerging markets were an adaptation of models that were working in the West. China was one of them.

During the early days of the internet, we witnessed the birth of Alibaba and Baidu, which were dubbed the eBay and Google of China. What followed was a material platform shift to mobile. At that time, China had already developed an ecosystem with the 5Cs, which underpinned the creation of world-changing innovation in mobile e-commerce, super apps and short videos.

In the US, many companies have been able to navigate regulatory risks in the past decades through a combination of a strong legal team, political gridlock, and luck.

With successful innovation ecosystems in place, we are likely to continue to see future innovation coming from both the US and China.

When looking for the innovators of the future, it will be important to focus on the companies that retain their DNA and the qualities that made them great, as major cost-cutting measures are likely to eventuate from AI. These companies have the potential for a longer growth runway.

And while a higher interest rate environment has indeed caused much financial pain, it has also made some companies more focused, leaner, and focused on ways to generate returns at a faster pace.

In this tough environment, it becomes clearer which companies are improving faster than the others.

 

Matt Reynolds is an Investment Director for Capital Group Australia, a sponsor of Firstlinks. This article contains general information only and does not consider the circumstances of any investor. Please seek financial advice before acting on any investment as market circumstances can change.

For more articles and papers from Capital Group, click here.

 

RELATED ARTICLES

The health care breakthrough that’s not an obesity drug

Facebook's problem became a great opportunity

Anyone for a dip? Price falls a buying opportunity

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Latest Updates

Investment strategies

Finding income in an income-starved world

With term deposit rates falling, bonds holding up but with risks attached, and stocks yielding comparatively paltry sums, finding decent income is becoming harder. Here’s a guide to the best places to hunt for yield.

Economy

Fearful politicians put finances at risk

A tearful Treasury chief, a backbench rebellion, and crashing bonds. What just happened in the UK and why could Australia’s NDIS be headed for the same brutal fiscal reality?

Shares

Investing at market peaks: The surprising truth

Many investors are hesitant to buy into a market that feels like it’s already climbed too far, too fast. But what does nearly a century of market history suggest about investing at peaks?

Shares

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Investment strategies

Will stablecoins change the way we pay for things?

Stablecoins have been hyped as a gamechanger for the payments industry. But while they could find success in certain niches, a broader upheaval of Visa and Mastercard's payments dominance looks unlikely.

Infrastructure

An investing theme you can bet on for the next 30 years

Investors view infrastructure as a defensive asset class rather than one with compelling growth prospects. These five tailwinds for demand over the coming decades suggest that such a stance could be mistaken.

Investment strategies

A letter to my younger self: investing through today's chaos

We are trading through one of history's most confounding market environments. One day, financial headlines warn of doomsday scenarios. The next, they celebrate a new golden age. How can investors keep a clear head?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.