“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 rule book.)
But which of these companies, representing these nine emerging themes, have the competitive advantages and management teams to thrive?
Here are the 18 companies in the Morningstar Exponential Technologies Index that also made our Best Companies to Own list in 2023.
|Agilent Technologies Inc||A||Healthcare||Diagnostics & Research|
|Analog Devices Inc||ADI||Technology||Semiconductors|
|Ansys Inc||ANSS||Technology||Software - Application|
|Autodesk Inc||ADSK||Technology||Software - Application|
|Bristol-Myers Squibb Co||BMY||Healthcare||Drug Manufacturers - General|
|Cisco Systems Inc||CSCO||Technology||Communication Equipment|
|Gilead Sciences Inc||GILD||Healthcare||Drug Manufacturers - General|
|Intuit Inc||INTU||Technology||Software - Application|
|Johnson & Johnson||JNJ||Healthcare||Drug Manufacturers - General|
|Keysight Technologies Inc||KEYS||Technology||Scientific & Technical Instruments|
|Merck & Co Inc||MRK||Healthcare||Drug Manufacturers - General|
|Microchip Technology Inc||MCHP||Technology||Semiconductors|
|Microsoft Corp||MSFT||Technology||Software - Infrastructure|
|Texas Instruments Inc||TXN||Technology||Semiconductors|
|Tradeweb Markets Inc||TW||Financial Services||Capital Markets|
|Tyler Technologies Inc||TYL||Technology||Software - Application|
|Waters Corp||WAT||Healthcare||Diagnostics & Research|
Let’s take a closer look at what Morningstar thinks of Broadcom AVGO, which is exposed to four of the nine themes, tied for the most with Analog Devices ADI and Texas Instruments TXN among the companies on our Best Innovative Companies to Own list.
Themes: Big data and analytics, nanotechnology, hyperconnectivity, and cloud computing.
Broadcom is the sixth-largest semiconductor company globally and has expanded into various software businesses, with over $30 billion in annual revenue. It sells 17 core semiconductor product lines across wireless, networking, broadband, storage, and industrial markets.
“Broadcom is a terrific aggregator of smaller firms. Its ability to acquire and streamline generates strong profits and cash flow, and fuels its robust dividend. We laud the firm for its execution and operating efficiency, which build upon its large organic investment and help it to outperform its end markets organically.
“In our view, Broadcom’s networking and wireless chip businesses are its strongest and contribute heavily to the firm’s wide economic moat. We anticipate it maintaining a technological lead in thin-film bulk acoustic resonator, or FBAR, filters, which it sells exclusively into Apple’s AAPL iPhone. We also expect it to maintain product leadership in merchant silicon for switching and routing applications and to defend its strong relationships with heavyweight equipment vendors Cisco Systems CSCO and Arista Networks ANET. Broadcom’s software largely focuses on relative market niches like mainframe programs and enterprise software development, but we see its offerings as highly competitive. Broadcom’s focus on strategic large software customers like financial institutions and governments—where it is deeply embedded—elicits steep switching costs.
“We like Broadcom’s pending acquisition of narrow-moat VMware VMW and assign it a 50% probability of closing. The acquisition would be its latest and largest push into software, resulting in a near-equal revenue split between chips and software. We see the deal as modestly value-accretive for Broadcom and neutral to its wide moat due to expected cost synergies.
“Going forward, we see Broadcom benefiting from moderate, steady growth from data center networking, Apple unit sales, and upselling for its software customers. We believe artificial intelligence will become a material organic driver to the networking business, as applications like large language models require advanced network switching, where Broadcom’s chips are best-of-breed. We expect acquisitions to still be on Broadcom’s radar but perhaps with larger, less frequent deals.”
—William Kerwin, Morningstar equity analyst
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