We recently compiled a list of the UBS’ Top Tech Based Disruptive Stocks For 2030: Top 29 Stocks. In this article, we are going to take a look at where Intercontinental Exchange, Inc. (NYSE:ICE) stands against the other tech based disruptive stocks.
When it comes to investing and making massive gains on the stock market, disruption is the name of the game. The biggest firms on the market right now are all disruptors of their industries. These firms have ushered in new products and used technology to allow consumers to improve their daily lives.
Since the word disruption is well used in stock market discourse, a brief history lesson is in order. The term disruptive innovation was popularized by the late Harvard Business School professor Clayton Christensen. Despite being widely used, disruption innovation is far from being a widespread effect. In essence, while all disruptive innovation is innovation, not all innovation is disruptive innovation. To understand how, consider an HBR article co authored by Professor Christensen. In it, the authors share that “too many people who speak of “disruption” have not read a serious book or article on the subject.”
Truly disruptive firms end up anticipating the needs of customers that larger incumbents ignore, believe Christensen and his compatriots. This enables the entrants to establish a foothold in the market, after which they upscale their products to also target the customers that incumbents are focused on. However, a firm doesn’t have to be an entrant in its industry to be a disruptor, as the authors point to the iPhone’s success in leveraging existing business processes that truly reshaped the course of the world.
Consequently, in order to analyze the stock market returns offered by disruptive innovation, a good place to start would be to see the share price of firms that Professor Christensen believes are disruptors. The article provides two examples; one is of the firm responsible for the iPhone and the other is of the company that is dominating the global streaming market.
Starting from the former, its shares are up by a whopping 209,000%+ since they started trading on the NASDAQ exchange. The latter is a relatively newer entrant to the stock market. The stock started to trade in 2002, and since then, it has gained 61,000%+. Mind you, both of these are calculated after stock splits. Safe to say, disruption is rewarding, but to understand its impact on the share price of the former company, we’ll have to dig in slightly deeper.
Using post split stock prices, before the launch of the iPhone, the shares had gained roughly 3,800%. Since the launch of the iPhone, the stock is up by almost 4,600%, despite the higher base effect of the higher share price and the global stock market disruption during the 2008 Great Recession and the COVID 19 recession. In today’s AI driven market, the firm is one of the most valuable companies in the world courtesy of its $3.51 trillion market capitalization.
Since disruption often occurs on market fringes, it’s hard to predict which firm will be the next one to shake things up. Using Christensen’s criteria, the world’s preeminent AI GPU manufacturer whose shares are up 727% since OpenAI publicly released ChatGPT isn’t a disruptor. This is because it offers its products and services to customers that it serves already, while true disruptors are those that might end up gaining market popularity by catering to customers that are ignored by large incumbents due to profitability or other factors.
Another great example of disruption, or what Christensen terms as ‘big bang disruption’ is in the gaming console market. For years, two gaming consoles, namely the Xbox and the PlayStation have dominated the market. Within these, the PlayStation is the original disruptor and a device that dealt a deadly blow to the arcade industry. In American culture, Pinball holds a pivotal place, especially for those who were growing up in the pre internet era.
Data from Harvard shows that Pinball sales in the US peaked at roughly 1.3 million units in 1993, despite the fact that arcade video games had already become available since 1978. However, from the 1.3 million units in 1993, the sales dropped to less than 5 million in just a couple of years in 1997. This was because the PlayStation was launched in 1994, and by 1997, its sales had surged to 20 million. A key differentiating factor for the console that enabled its meteoric rise was its popularity. The PlayStation at the time was available for $299 while Pinball machines could cost as much as $7,500. The console also offered more video game variety, and it allowed children and adolescents to enjoy gaming from the comfort of their homes. In short, the video game console served the needs of players ignored by Pinball (those who wanted to play at home), and its ‘big bang’ occurred when the console caught on with the broader Pinball market.
Therein lie the secrets to disruption. With these details in mind, let’s look at UBS’ latest list of firms that can use technology to disrupt their industries. The bank believes that “these are leading disruptors in sectors undergoing technological transformation, which should lead to consequential and enduring impact” to allow them to deliver “superior earnings growth.”
Our Methodology
To make our list of stocks that will use technology to disrupt their industries, we divided the 29 stocks in UBS latest report into two categories. The first lists OTC stocks by their year to date share price gains, while the second ranks US listed stocks by the number of hedge fund shareholders during Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
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Intercontinental Exchange, Inc. (NYSE:ICE)
Number of Hedge Fund Holders In Q2 2024: 70
Intercontinental Exchange, Inc. (NYSE:ICE) is one of the most consequential financial technology and services firms in the world. It owns and operates the illustrious New York Stock Exchange, which is the world’s most valuable stock exchange in terms of market capitalization. Consequently, Intercontinental Exchange, Inc. (NYSE:ICE)’s indisputable position on Wall Street as the go to medium for public listings provides it with a wide moat and reduces the threat from new entrants. However, unlike Nasdaq Inc which has managed to diversify its revenue, as of H1 2024, 62% of Intercontinental Exchange, Inc. (NYSE:ICE)’s revenue came from its exchange business. Consequently, the firm thrives when capital market conditions enable robust trading activity. In fact, Intercontinental Exchange, Inc. (NYSE:ICE)’s decision to spend $16 billion to buy data analytics provider Black Knight has still been unable to remove the domination of exchanges on its income statement. The firm benefits from the fact that it runs a wide variety of exchanges apart from the NYSE. These include bonds, futures, and others to introduce critical diversification within the exchanges revenue stream. In fact, Intercontinental Exchange, Inc. (NYSE:ICE) benefited from the diversification during the third quarter when energy trading volume grew by 23% annually and was driven by natural gas.
Third Point Management mentioned Intercontinental Exchange, Inc. (NYSE:ICE) in its Q2 2024 investor letter. Here is what the fund said:
“During Q2, we added to our position in Intercontinental Exchange, Inc. (NYSE:ICE). We originally invested in ICE in April 2023 when the FTC’s challenge to the company’s proposed acquisition of Black Knight impacted the share price. While the deal overhang has lifted, we believe a re-rating opportunity from a structural and cyclical acceleration of growth is still ahead. Importantly, we expect that AI will drive new growth opportunities across most of ICE’s businesses, extending the runway for value creation.
ICE is a collection of dominant information services and exchange assets that automate diverse and large asset classes (Energy, Mortgages, Fixed Income, Rates and Equities) while producing vast amounts of proprietary data. CEO Jeff Sprecher has led ICE for over 20 years. Under his visionary leadership, the company has compounded organic revenue and EPS at ~5% and ~15%, respectively, and adopted new modalities through organic investment and strategic acquisitions, most notably creating the flagship clusters of Energy and Mortgage, franchises we believe are of very high business quality. On the horizon, we expect an acceleration of growth to a consistent low double digit organic algorithm in these businesses, and a re-rating of the stock as price follows value creation…” (Click here to read the full text)”
Overall ICE ranks 10th on our list of UBS’ top tech based disruptive stocks for 2030. While we acknowledge the potential of ICE as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ICE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.