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.

 

  •   3 April 2024
  • 1
  •      
  •   

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

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Australia has saved $4.5 trillion for retirement. Here's what matters more

Most Australians approaching retirement can tell you the exact dollar value of their super account. But success depends on more than a sizeable balance. Here's four key questions to ask yourself at the start of the financial year. 

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

Latest Updates

Retirement

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

Investing

The investment that sidesteps the new tax traps

Tax rules have changed, but many investors are still using yesterday’s strategies. Insurance bonds may offer advantages for those seeking greater control, tax efficiency and certainty about their wealth.

Shares

The role of shareholder yield in a portfolio

Investors may be overlooking a timeless source of returns in a volatile market. The companies that consistently generate and return cash to shareholders have often proved remarkably resilient through uncertainty.

Shares

Australian inflation still well above the RBA's target

The RBA has spent more than three decades pursuing its 2%-3% inflation target. But the numbers tell a far more complicated story than the headlines. The results may surprise both its strongest critics and most loyal defenders.

Retirement

Retirement in reality - 5 months in

Retirement planning doesn't end when work does. Five months in, Joanne reflects on retiring at a different time to your spouse, coping with setbacks and the importance of rest. Some lessons only become clear after the fact.

Latest from Morningstar

What 6 key market indicators are telling investors right now

Are markets still expensive? There are the seven key indicators every investor needs to know. From gold and equities to bonds, oil, bitcoin and the US dollar. The data reveals where opportunities and risks may lie for investors today.

Investing

Can you ride the AI bubble without overpaying?

AI may prove as transformative as the internet, but markets are behaving as if success is guaranteed. As capital races towards unprecedented levels, investors should ask whether enthusiasm is getting ahead of reality.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 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.