Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 212

Disruption supports small company growth

This month marked the 10th anniversary of the launch of the original Apple iPhone. It was another reminder of how dynamic the global investment landscape has become in recent years. While Apple investors cheered the launch of the smartphone device, it would be difficult to think that they, or even founder Steve Jobs, would have appreciated at the time just how significant the device would be to some industries over the following decade.

The iPhone underpins market growth

The market capitalisation (cap) for Apple, already growing well on the back of the refreshed Mac and iPod offerings, was at US$105 billion at the time of the launch. A decade later, the business commands a market cap of more than US$750 billion. The equity value generated to shareholders over that period cannot be entirely attributed to the iPhone, but its introduction would prove to be a critical inflection point for both Apple and a multitude of other industries in bringing the internet into the consumer’s pocket. It is estimated there are over 700 million active iPhone users globally, while more than half of the entire world’s population has access to an IOS or Android smartphone device.

Opportunities and threats of new technology

Investors today are increasingly challenged by both the opportunities and threats that new technologies bring to established business models. The investment management community needs to continually review and re-test the potential for a company to be disrupted by an emerging entrant or identify an inherent opportunity in new business models. With more sophisticated technology, globally-connected communities and a venture capital industry that is willing to fund untested business strategies, the rate of change and the consequences of those changes continue to increase dramatically.

In the iPhone’s case, the impact from its introduction extended well beyond smartphone unit sales and broader industry market share. Entire industries have been created as a result of ready and easy access to the internet on a personal device. Telco operators, for one, have been huge beneficiaries from significant growth rates in data usage. Telstra, for example, has experienced a nine-fold increase in Australian mobile data consumption in the last five years alone, a trend that has been equally replicated on the global stage.

Global mobile data usage vs voice 2011-2016

Source: Ericsson Mobility Report 2016

The smartphone also paved the way for an entire wave of new app-based business models such as Uber, SnapChat, WhatsApp and Spotify, all dependent on smartphone functionality. Using the latest available private valuation data, those four companies alone now have combined equity value of about US$120 billion, which is higher than Apple’s total market cap at the time of the launch.

The hyperbole is seemingly endless, from the enormous subsequent growth in active users for social media heavyweights Facebook, LinkedIn and Twitter to the estimated US$70 billion in earnings generated by the global app developer community since the launch of the Apple App Store in 2008. These are entire industries and companies that did not exist less than 10 years ago and for investors that were able to recognise the opportunities early, the returns have been exceedingly profitable.

Casualties are left in the wake

Momentous change also often brings with it inevitable casualties, where the products and companies that are unable to adapt are often ruthlessly left behind. In the iPhone’s case, manufacturers of digital cameras, personal GPS products and older-world mobile phones were unable to recover from the onslaught of multi-media smartphone devices. At the time of the iPhone’s release in 2007, Blackberry held about 50% of the mobile phone market in the US, with the company’s market cap peaking a year later just shy of US$80 billion. Ten years on, the company now trades with a market cap of US$5 billion.

Small and mid-cap providing opportunities

In Australia, there are ample opportunities to identify businesses that can benefit from emerging structural changes. While the larger cap end of the market tends to skew more toward older-world business that will likely view disruption as a threat, the emerging small and mid-cap company space has provided investors with opportunities to benefit from rapid and broad-based change.

The recent move by small and large businesses to host IT infrastructure in the cloud, for example, has created enormous tailwinds for the providers of external data centres and IT services. Where businesses once located their IT systems and servers on their own premises, cloud technology enables this function to be outsourced. NextDC (ASX:NXT) is a large provider of data centres and has seen its revenue more than double over the last three years.

For outdoor advertising, the introduction of digital screens and electronic billboards single-handedly revitalised an industry that before 2012 looked devoid of any meaningful growth. The ‘Out of Home’ media industry in Australia has seen revenues grow by more than 50%. After an initially shaky start to listed life, the share price of Ooh! Media (ASX:OML) has almost doubled since its ASX listing in December 2014.

OML revenue growth over ten years

Source: Ooh! Media Limited 2016 Annual Report

The opportunities available from new technologies and new markets have also extended into the more traditional primary industries. The fortunes of dairy and infant milk formula provider A2 Milk (ASX:A2M) may have been less stellar without the emergence of cross border e-commerce retail websites (Tmall, that opened up an entirely new market into China. A2 Milk generated just NZD$42.2 million in group sales in 2011 while that figure is expected to grow to above NZD$540 million at the coming FY17 results.

In an economic and corporate landscape that continues to evolve at an increasingly rapid rate, investors need to balance the threats of change to traditional business models with the opportunities available for new ones. One of the real pleasures of investing within the emerging companies space is the variety of businesses and industries available to leverage to these emerging trends.


Andrew Mitchell is Portfolio Manager and Co-Founder at Ophir Asset Management. This article is general information that does not consider the circumstances of any individual.



The investment bias against small companies


Most viewed in recent weeks

10 little-known pension traps prove the value of advice

Most people entering retirement do not see a financial adviser, mainly due to cost. It's a major problem because there are small mistakes a retiree can make which are expensive and avoidable if a few tips were known.

Check eligibility for the Commonwealth Seniors Health Card

Eligibility for the Commonwealth Seniors Health Card has no asset test and a relatively high income test. It's worth checking eligibility and the benefits of qualifying to save on the cost of medications.

Hamish Douglass on why the movie hasn’t ended yet

The focus is on Magellan for its investment performance and departure of the CEO, but Douglass says the pandemic, inflation, rising rates and Middle East tensions have not played out. Vindication is always long term.

Start the year right with the 2022 Retiree Checklist

This is our annual checklist of what retirees need to be aware of in 2022. It is a long list of 25 items and not everything will apply to your situation. Run your eye over the benefits and entitlements.

At 98-years-old, Charlie Munger still delivers the one-liners

The Warren Buffett/Charlie Munger partnership is the stuff of legends, but even Charlie admits it is coming to an end ("I'm nearly dead"). He is one of the few people in investing prepared to say what he thinks.

Should I pay off the mortgage or top up my superannuation?

Depending on personal circumstances, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. Do the sums and ask these four questions to plan for your future.

Latest Updates

Investment strategies

Three ways index investing masks extra risk

There are thousands of different indexes, and they are not all diversified and broadly-based. Watch for concentration risk in sectors and companies, and know the underlying assets in case liquidity is needed.

Investment strategies

Will 2022 be the year for quality companies?

It is easy to feel like an investing genius over the last 10 years, with most asset classes making wonderful gains. But if there's a setback, companies like Reece, ARB, Cochlear, REA Group and CSL will recover best.


2022 outlook: buy a raincoat but don't put it on yet

In the 11th year of a bull market, near the end of the cycle, some type of correction is likely. Underneath is solid, healthy and underpinned by strong earnings growth, but there's less room for mistakes.


Time to give up on gold?

In 2021, the gold price failed to sustain its strong rise since 2018, although it recovered after early losses. But where does gold sit in a world of inflation, rising rates and a competitor like Bitcoin?

Investment strategies

Global leaders reveal surprises of 2021, challenges for 2022

In a sentence or two, global experts across many fields are asked to summarise the biggest surprise of 2021, and enduring challenges into 2022. It's a short and sweet view of the changes we are all facing.


What were the big stockmarket listings in record 2021?

In 2021, sharemarket gains supported record levels of capital raisings and IPOs in Australia. The range of deals listed here shows the maturity of the local market in providing equity capital.


Let 'er rip: how high can debt-to-GDP ratios soar?

Governments and investors have been complacent about the build up of debt, but at some level, a ceiling exists. Are we near yet? Trouble is brewing, especially in the eurozone and emerging countries.



© 2022 Morningstar, Inc. All rights reserved.

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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.