I remember clearly the first time I thought hard about exponential change.
My father was reading Future Shock – a book written in 1970 about the impact too much change in too short a time has on individual psychology.
We talked about ideas in the book. And the notion that technology could advance faster than our minds could keep pace absolutely fascinated me. As I played with concepts in my mind, I imagined what it would be like waking up every day to a world as different from the day before as a day in 1980 seemed from the 1920s.
Now, according to Albert Bartlett, an American physicist of the 20th century, “The greatest shortcoming of the human race is our inability to understand the exponential function.”
Indeed, the notion of an increasing rate of change of the rate of change takes a bit of noodling. But to wrap your head around the impacts of accelerating change doesn’t require a lot of fancy math. For me, all it took was a bit of imagination along with enough curiosity to stick with the idea for a while.
Essentially, you can think of it as changing change with a rocket booster attached. 100 years of progress becomes 10 years of progress which becomes 1 year, etc.
Well, 40-years on from the time my dad planted that seed of an idea in my head, we’re not quite to that point. But technological advances that once took a generation now get covered in half a decade. So, for all practical purposes, Future Shock is upon us.
And to prosper in the years ahead, it is imperative that you don’t let today’s pace of technological progress shut your mind off from seeing the incredible opportunities to profit in the years ahead.
It All Boils Down to Automation
Keeping pace with technology today can be overwhelming.
It can stop you in your tracks like a deer in headlights. But when you boil down the various disruptive technologies to their basic impact, the future gets much simpler.
For example, consider robotics and artificial intelligence.
These are just two of the exponential trends defining the current age of disruption. Now, I couldn’t possibly list every application of these technologies in use today. But suffice it to say, robotics and AI touch almost everything we do.
However, combined into a single thought, they represent a hyper-automation.
And that hyper-automation applies to both the physical world of manufacturing equipment and transportation as well as how we manage information that only exists virtually.
Shifting ROC into Hyperdrive
In Japan, robots build robots in non-stop shifts for up to 30 days straight. They not only turn off the lights at the factory, but heating and AC too. And it’s not hard to imagine AI managing those processes to run uninterrupted for even longer, providing an additional boost to productivity.
Early versions of artificial intelligence have answered our calls and questions for years now. But we’re now at the point where a company like Upstart Holdings (NASDAQ: UPST) can make billions of dollars in loans without a single person involved.
And, for an investor, the implications are even simpler. Machines doing the work, whether physical or virtual, can lead to incredibly high returns on capital (ROC).
For example, while the average company in the U.S. only manages to return 4% on every dollar it invests in its business, UPSTs AI-driven lending process returns profits to investors at over 10-times that amount.
And eGain Corporation (NASDAQ: EGAN) has implemented AI to it software-as-a-service (Saas) solutions to propel the return on capital it delivers to shareholder from negative to over 28%.
So, the real trick lies in finding those companies that successfully implement productivity boosting technologies. And that success shows up as a high ROC.
But not all AI technology is ready for primetime.
Less Luster than Labor
Just look at UIPath (NYSE: PATH).
It sells a version of AI called robotic process automation (RPA).
Now, these aren’t physical robots. Rather, they are virtual. And they use these robots to read the information contained in documents like PDFs, converting it into data so the information can be processed seamlessly.
I worked with UIPath a couple of years ago to see how they could help me convert financial statements for over-the-counter stocks (OTC) into a database. You see, OTC companies aren’t required to provide financial information in a digital reporting language called XBRL. They only post it in PDFs. So, I reached out to the company to see how they might help me streamline the fundamental side of my investment process.
Unfortunately, the cost was way too high.
At over $100K, it would have to spend nearly 6 times more than what another company charged to outsource the job to financial analysts in India who manually entered the information. And UIPath’s solution would be highly prone to breaks. Which would mean more consulting and programming time, (and delays), when the process broke down.
I obviously chose the cheaper, more reliable, route.
However, that lack of readiness didn’t stop UIPath’s executive team from going public during the AI IPO frenzy earlier this year. And who could blame them since investors were willing to bid the share price well past what the stock is worth.
But we can’t let Future Shock blind us into overpaying.
I have the stock on my list of stocks to short. But PATH’s stock price technical indicators don’t quite yet scream “Sell.”
But I found another AI company whose stock both trades at too high a price and has weak technical indicators.
It sells a “Horizontal” application of AI. Horizontal means it has a very broad solution that it applies across many industries. While Upstart and eGain target very narrow applications of AI.
But what it really means is they do too much. Which doesn’t lend itself to efficiency, nor a high ROC…at least not yet.
Veritone Inc. (NASDAQ: VERI) sells AI-based solutions that scan audio files, videos, and text to extract data that it can convert into a structured database (much like I hoped UIPath would be able to do with those OTC PDFs).
But the company carries far too much overhead relative the sales it has achieved to date. And should the company manage to grow sales as high as 40% per year, that still won’t be enough make all the investments the executive team has made in the company pay off for investors.
This is one to keep your eye on for downside potential.
To your success,
Don Yocham
