The art of recognising a technology that is ripe for picking

COLUMN: As an investor, it is vital to understand the so-called hype cycle of new technologies, says Danske Bank’s investment strategist, Lars Skovgaard Andersen. There is a vast difference between when something makes a good news story and when it makes a good investment.

We regularly hear of new, groundbreaking technologies and the undreamt of possibilities they open up – along with the enormous financial potential they hold. As an investor, it sends an involuntary tingle down our spine.






Unfortunately, however, things are seldom as easy and painless as the optimists expect. First, the jump from prototype to commercially viable technology is often large; and second, many of the best ideas get bought up by larger companies or asset funds. Even if you are lucky enough to actually get to invest in one of the promising new technologies via the stock market, these equities can often be surrounded by so much hype that valuations bear little resemblance to reality. In many cases, earnings simply cannot match the soaring expectations.

Timing is everything in the hype cycle 

This is because new technologies can be enormously hyped and investors often become so scared of missing the boat that they uncritically jump aboard at a point that is much too early or expensive. We at Danske Bank therefore have a great deal of focus on when investors should ideally invest in new trends – in  other words, the art of timing investments correctly in the so-called hype cycle for new technologies.

A hype cycle describes the classic lifecycle for new technologies from the investor’s viewpoint – and here the problem is that we typically overestimate the short-term effects and underestimate the long-term effects. We expect that new technologies will revolutionise the world within a short space of time, but that is rarely the case. Then, while the hyped interest wears off and disappointed investors rein in their ambitions, the technology gradually matures and develops until it gets its broad, commercial breakthrough.

Lars Skovgaard Andersen

Investment Strategist, Danske Bank

During this process we often find that the companies who were part of creating the original hype are not the sector’s long-term winners. However, if investors have burned their fingers on the technology’s early, promising players, it may be hard to ride the wave again when the technology actually becomes commercially mature.

When things went wrong 
Take smartphones, for example. Back in the late 90s and early 00s the dream was to access the internet with our mobile phones, and that created a great deal of hype that contributed to the collapse of the dot.com bubble.

Many investors lost so much money on IT equities that several years passed before they again had a desire to consider that option when investing, which resulted in massive ‘lost’ returns. For in the meantime Apple had reinvented itself and given the smartphone its global breakthrough and shareholders an enormous return, while many of the investors who had got burned watched passively from the sidelines and could only note that the original frontrunners like Nokia and Ericsson had been shunted aside. 
 
When I consider the tech sector at present, 5G is one of the areas where the hype seems overblown. There is no doubt that Western companies are on the cusp of usurping Huawei, but the rollout of 5G is happening slowly, and it is not certain whether 5G will be an attractive investment case any time soon.

Timing is right for electric vehicles  

In contrast, electric vehicles are a theme that, in our opinion, is starting to be at that point in the hype cycle where they look very interesting from an investment perspective. The technology is gaining increasing global commercial momentum – and when I write electric vehicles and not electric cars, that is completely deliberate. While Tesla may well have made driving electric cars cool, there are lots of spinoffs from the technology. Just consider the electrically driven scooters we see everywhere in our major cities at present, and the electric bikes on the cycle paths.

Lars Skovgaard Andersen 

Investment Strategist, Danske Bank 

Big countries like China and India have a great deal of focus on developing electric vehicles – not least to mitigate pollution – and that means major investments in the research and development of new and even better solutions. Thus things could really take off, and this is part of the reason why we believe in the business case from an investor’s point of view.

To be completely honest, I have no idea where we will find the winners of the future in the area of electric vehicles, but I feel sure the initial hype has passed. The great uncertainty about which companies will be the future winners within this technology make it imperative to have a broad exposure across companies and technologies, so this is currently our approach to the investment case. And while it may sound a little boring, we are focused on slightly larger companies that have more than one leg to stand on.

This content is not investment advice - you should always speak to an advisor about how a possible investment matches your investment profile before making an investment.