These days, there’s increasing talk about disruptive technologies, a growing category investors can access via scores of innovation stocks.
As humans and market participants, we’re always on the look out for the next big things. In the markets, that often means hunting for the next Amazon (NASDAQ:AMZN) or Apple (NASDAQ:AAPL).
Obviously, companies of that magnitude don’t come along very often, but searching for innovation stocks remains compelling. And rewarding. Take the cases of the ALPS Disruptive Technologies ETF (CBOE:DTEC) and the Nasdaq-100 ETF (NASDAQ:QQQ), two exchange traded funds chock full of disruptive names. Those funds are up an average of 37% over the past year, or more than triple the returns posted by the S&P 500 over the same period.
Interestingly, the concept of investing in innovation isn’t new. It’s actually quite old, but investors can make the objective easier by narrowing the playing field.
Here are three innovative stocks to buy now:
Roku (ROKU)
The purveyor of hardware that’s integral to the functioning of streaming television, Roku is the epitome of an innovation stock and it has the growth chops to go along with that status as highlighted by a year-to-date gain of 61%.
Much has been made of Roku’s 2020 bullishness being attributable to the novel coronavirus pandemic, which is forcing folk to stay at home and embrace good old fashioned movie nights and binge watching.
With 3,000 and 500,000 movies and shows, Roku obliges. Critics assert ROKU stock is expensive and perhaps getting too big (almost $26 billion market capitalization) to lure an acquirer. The latter is perhaps true and at more than 20x trailing revenue, the former is certainly true. However, revenue growth of 42% in the second quarter is supportive of lofty multiples.
In fact, for a disruptive name, Roku is moving rather rapidly, worth noting because disruption can take some time. That’s likely to be the case in the linear TV, but as that segment suffers, Roku is poised for more upside.
“Disruptive innovation typically evolves slowly, until it hits a tipping point. Since peaking in 2011, the number of US linear TV households has been declining at an annual rate of 2.1%, a rate that we believe will accelerate to -15% at an annual rate during the next five years,” ARK Investment Management said in a research report. “Cumulatively, the number of U.S. linear TV households could drop 48% from 86 million as of 2019 to roughly 44 million, a level last seen more than 30 years ago in the late 1980s.”
Invitae (NVTA)
Invitae is a genomics company, which alone qualifies as innovation stock status. Specifically, the company is engaged in genetic screening. One of the drivers of genomics screening and testing growth is declining costs, which makes these innovations more accessible to a broader swath of patients.
The company’s screening capabilities, which include a wide range of diseases including cancers and more, can cost close to $500 out of pocket for a patient and while that may be pricier than some competitors, the sheer expanse of Invitae’s capabilities is alluring for clinicians and investors alike.
“Invitae is trying to bring genetic testing, the kind that will actually change the world, to the everyone,” notes Capital Market Laboratories.
One way of considering Invitae’s disruptive, innovative credentials is the lens of paradigm shifting, which the company is bringing to the diagnostics space. Additionally, the company is a prescient deal-maker. Earlier this year, the company said it’s acquiring Diploid, Genelex and YouScript, buys that should bolster its diagnosis capabilities.
“ARK believes Invitae will unlock latent demand with lower pricing, more comprehensive testing, and an easier order entry system. Its investments, both internal and external, also should lower cost-of-goods-sold (COGS) and translate into sustainable operating cash flows as it scales,” according to the asset manager.
ARK Fintech Innovation ETF (ARKF)
As its name implies, the ARK Fintech Innovation ETF is a fund, not a stock, but it’s at the epicenter of multiple disruptive themes. In fact, fintech is one universe chock full of innovation due to amount of disruption many ARKF components are causing for traditional banks.
Fintech, like streaming entertainment and online retail, is getting a lift from the pandemic as consumers turn to cards and digital payments over cash. However, that movement was underway prior to Covid-19, confirming that ARKF has long-lasting potential past the virus’s expiration date.
Additionally, fintech companies are able to attack traditional banks on multiple, including via digital wallets, micro loans, smaller business loans and other areas where banks lack interest or bandwith to service smaller enterprises. What’s pivotal is that fintech companies run leaner operations with higher margins, lower fixed costs and much lower customer acquisition costs than old guard banks.
“Competition in the retail payments sector is intensifying around the world,” said Moody’s Investors Service. “Fast-changing technologies are driving a rapid increase in online and mobile payments with new players, offering slick, single-click digital wallets and smartphone apps, grabbing part of the retail payments market, an area traditionally dominated by banks.”
Speaking of costs, it’s not cheap to run a bank branch, a concern that’s irrelevant to ARKF components, but one investors should consider as a perk with this ETF. ARK estimates it costs $500,000 a year to run one branch and a bank spends $1,000 to acquire a single customer while a fintech company spends $20.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
