The genesis of innovation in three different areas continues to change our lives – and where investors are putting their money
Laws are used to govern our land – but they also point to the future. Many of you might have heard of Moore’s Law, the observation that semiconductors would get meaningfully faster and cheaper over time, improving computing power. But what about Flatley’s Law or Wright’s Law?
All three have helped pave the way for some of the most compelling advances of the past 50 years, driving long-term opportunity for savvy companies and investors.
1. Moore’s Law
Intel co-founder Gordon Moore famously observed that the number of transistors that fit onto an integrated circuit doubled roughly every 18 months to two years, effectively providing more processing power at the same cost. He further observed that there was no reason that progress couldn’t continue.
This pace of progress helped fuel the personal computing revolution in the 1980s and 1990s and paved the way for mobile phones, self-driving cars and health care devices.
Isaac Sudit, equity investment analyst at Capital Group, said: “As semiconductors become cheaper and more efficient, they will penetrate more aspects of our daily lives. By and large, they will continue to drive improvements in things we already use, like phones and tablets, cars, entertainment systems and appliances.
“The costs are dropping to the extent that we can start creating new business models that allow companies to generate money, and that's what we're seeing,”
Sudit, who has a PhD in physics and worked as a scientist in both academia and in the industry before becoming an investment analyst, said his background provides him with a unique perspective as a professional investor but not for the reasons you might think.
He explained: “Being able to understand technology allows me to focus more time on execution, operations, finances and strategy. These competencies are more important than just technology to build sustainable competitive advantages.”
2. Flatley’s Law
When the human genome was first sequenced about two decades ago, it took a team of researchers at the National Institutes of Health (NIH) some 15 years at a cost of more than US$2.7 billion.
Jay Flatley, former chairman of medical technology company Illumina, set his company not on a mission to discover some new innovation, but to maintain a laser focus on execution. Today, thanks to improvements driven largely by Illumina, a human genome can be sequenced in about a day.
Breakthroughs in DNA analysis have led to a new era in medicine. “Today we can sequence tumors and compare their mutations to the map of the human genome,” said Rich Wolf, investment analyst. “We can then identify specific mutations and match therapies to them.”
Indeed, testing and therapies derived from genetic testing have the potential to extend lives and generate billions of dollars in revenue for the companies that develop them.
“Exciting new modalities like gene therapies, immunotherapies and cell-based therapies, which are now changing the trajectory of many cancers, could not happen without DNA sequencing,” Wolf said. “Very often the companies that develop and supply the picks and shovels to an industry can make powerful investments. If it were not for DNA sequencing many of these new therapies would not be possible. Just as in the case of semiconductors, if it were not for advances in extreme ultraviolet lithography, Moore’s Law might have broken down years ago.”
3. Wright’s Law
A third law related to declining production costs, Theodore Wright, an aeronautical engineer, observed in 1936 that when the production of airplanes doubled, costs declined by a fixed rate.
Taking Wright’s observation and applying it to advances in lithium-ion batteries, those most commonly used in electric cars, suggests prices should drop significantly for every doubling of production.
EV makers have recently been introducing models with lower prices, better performance and longer range. Typically, EV batteries can run 200 to 400 miles before they require recharging. Companies leading the race for cheaper, more efficient batteries include CATL in China, LG Chem and Samsung SDI in Korea, and Tesla in the U.S.
The International Energy Agency expects global EV sales to rise 28% a year over the next decade but those estimates may be too conservative, says equity investment analyst Kaitlyn Murphy.
“New developments will potentially make EVs cost competitive not only with new gas-burning cars but with the entire fleet of cars on the road, including used cars,” says Murphy, who covers U.S. automobile and components makers. “That’s about 270 or 280 million vehicles in the U.S. If you take a long-term view, that suggests there could be much stronger growth than the market expects.”
