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2016 Disruptive Innovations You Didn't See Coming: Tesla Battery and Bitcoin Blockchain

2016 Disruptive Innovations You Didn't See Coming: Tesla Battery and Bitcoin Blockchain

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Thursday, 17 December 2015 07:34 AM Current | Bio | Archive

With a new year only a couple of weeks away, it seems an opportune time to look at what disruptive innovations could shake up established players in 2016 and beyond.

Clayton Christensen, the Kim B. Clark Professor of Business Administration at Harvard Business School, coined the term “disruptive innovation” in a 1995 article he co-authored: “Disruptive Technologies: Catching the Wave.” He explains it as an innovation that takes an expensive, complicated product, available only to the few, and makes it more affordable and accessible, so a much larger population has access to it.
 
Technological improvements can spark the innovation, as was the case when cell phones replaced laptops, which replaced desktop computers, which replaced expensive mainframes. But a new technology isn’t always required. Two examples on Christensen’s website are the discount retailers’ impact on full-service department stores and retail medical clinics’ challenge to traditional doctors’ offices.
 
Two areas that may attract increasing attention next year are the battery and blockchain. The development of these areas may take many more years. But if and when they are ready for prime time, they are likely to be adopted faster than ever before while dramatically affecting both users and the established competition.

Read on for a look at what the future may hold:
 
Musk’s Master Plan

Elon Musk, CEO of Tesla Motors, makes beautiful, but expensive cars that run on a battery instead of using gasoline. Doing so makes him extremely successful. But the next two years will determine whether he’s remembered as someone who made fancy wheels for a few rich car buffs or a visionary who changed the way we power our cars and homes.
 
Much depends on Tesla’s $5 billion battery factory being built in Sparks, Nevada, known as the “Gigafactory.” It’s expected to come online in 2016 and aims to reduce battery costs by 30% or more, partly by bringing materials suppliers in-house, the WSJ reported. When it’s fully functional, the factory will produce more hours of battery cells than is currently produced in ALL of the battery plants in the world combined.
 
Right now, Tesla sells the Model S for roughly $70,000. The ability to reduce the cost of the battery will enable Tesla to introduce in March 2016 its Model 3, a $35,000 car for the mass-luxury market. The car, which won’t be delivered until late 2017, is expected to drive for 200 miles on an electric charge. That’s almost twice the mileage offered by Nissan’s LEAF or almost four times the mileage of Chevy’s Volt, which have slightly lower price tags.
 
The mass adoption of electric cars would disrupt a long list of industries, including auto companies, auto parts manufacturers (electric cars have far fewer parts), auto dealers (Tesla sells the cars directly to consumers), oil companies, refiners, and filling station owners.
 
The auto industry has enjoyed strong sales this year as consumers have bought cars at an 18.2 million units annual rate during the first 11 months of the year. It’s expected to grow earnings by 15.1% in 2016, yet the industry’s forward P/E has fallen to 7.0 from 8.9 last year.

Meanwhile, Tesla shares, at a recent $221.09, trade at 122.1 times the $1.81 a share of operating earnings that analysts forecast for 2016. This year, the company is expected to lose $1.26 a share. Rightly or wrongly, it’s clear which industry player has captured the imagination of investors.
 
Tesla wants to be considered not just a car company but also an energy innovation company. In addition to car batteries, Tesla’s Gigafactory will produce the Powerwall and the Powerpack. The Powerwall is a battery that, for the cost of $3,000, can run an entire home for eight hours. The Powerpack is a large battery system for utilities, commercial, and industrial customers. Both are already being produced in Tesla’s Fremont, California plant in small volumes, but their production will be transferred to the Gigafactory next year.
 
These batteries can store electricity from solar panels, so energy captured while the sun is shining can be used at night. The batteries could also draw low-cost electricity from the grid during off-peak hours, so it can be used during peak hours when energy in some areas is more expensive. In addition, batteries can be used as a back-up source of energy.
 
If batteries at home and solar power become commonplace, disruption in the utility industry could be widespread. The industry has high fixed costs, and every consumer or company that reduces its purchase of electricity reduces the revenue needed to cover those costs. The industry’s concern was covered in a Washington Post article on 3/15.
 
The Electric Utilities industry is expected to grow earnings only 2.7% next year, yet it sports a 14.6 forward P/E, 1.8ppts lower than it was a year ago. The sector has been a haven for investors looking for income, thanks to the dividends it pays. But with the Fed raising interest rates, investors may begin to look at the sector’s fundamentals again, and the threats from Tesla and solar power will certainly be part of that analysis.
 
Blockchain Revolutionizing Payments

Blockchain is a new way to track and execute payments using the Internet. Big money from Wall Street to Silicon Valley is funding startups that aim to use the technology to transfer money internationally and to settle stock and bond trades. And the industry is just getting started.
 
Blockchain is described as a “distributed public ledger.” Transactions occur directly between parties — or “peer-to-peer” (“P-to-P”) in industry lingo — without intermediaries like banks. Transactions are recorded in multiple places across the Internet. Changing the record requires the consensus of the majority of the participants. This makes it hard for hackers to break into the system. They would have to hack into many different places and change the information all at one time.
 
One speaker at a Wired Retail conference explained blockchain like this: We’re familiar with the Internet of Information. The blockchain is the Internet of Value. It keeps track of the value of any item and it keeps that information in various places across the Internet so it cannot be stolen or manipulated. It cuts out the middle man, allowing for low-cost, fast, peer-to-peer transactions.
 
The opportunity has started to attract real money. More than $1 billion has been invested in Bitcoin-related startups, CNN reported in November: "American Express, Bain Capital, Deloitte, Goldman Sachs, MasterCard, the New York Life Insurance Company, the New York Stock Exchange--all of them have poured millions of dollars into Bitcoin firms recently."
 
The best-known user of blockchain is bitcoin, the electronic currency with well-publicized problems including its volatility and its use in illicit activities. But blockchain could be used to execute transactions in any currency. Upstart Align Commerce provides cross-border payments for small businesses in traditional government-issued currency. Align takes the payor’s currency, exchanges it into bitcoin, and then exchanges the bitcoin into the payee’s currency. Align recently raised $12.5 million from investors led by Kleiner Perkins Caufield & Byers, the 11/17 WSJ reported.
 
Meanwhile, American Express invested in Abra, which has a blockchain-based remittance app in the US and Philippines markets, according to one Internet article. Even Western Union was planning earlier this year an “experiment” with Ripple Labs, a company that offers a competing distributed ledger to blockchain, according to an article on bankinnovation.net.
 
Blockchain could be used to track trades in stocks, bonds, or any other financial instrument. Earlier this week the former chairman of Barclays was appointed the non-executive chairman of London-based SETL, which has developed a version of the blockchain it hopes will be used by institutions to settle financial transactions, the 12/15 WSJ reported. The article goes on to say that, “More than 20 financial institutions, including Barclays and HSBC, have collaborated in a London-based working group to determine how blockchain technology can transform the way securities are traded, cleared, settled and reported.”
 
Blythe Masters, the former JP Morgan executive credited with creating the credit-default swap, is now CEO of Digital Asset Holdings, a startup that aims to enable banks, investors, and other market players to use blockchain technology to trade loans, bonds, and other assets, writes Bloomberg in a 8/31 cover story on her and blockchain. The article relates how she describes blockchain as “analogous to email for money.”
 
Ultimately, blockchain could become a way for those around the world who don’t have a bank account to make purchases on the Internet. And that could affect the banks as well as credit card companies like American Express, MasterCard, and Visa. But blockchain isn’t limited to money-based transfers. It could track titles on houses, transactions in the art world, or votes in an election.
 
Meanwhile, stocks of some of the companies that could be displaced or come under pressure if blockchain transactions take off have yet to flinch. Visa, MasterCard, and Western Union are in the Data Processing & Outsourced Services industry within the S&P 500 Technology sector. The industry sports among the market’s highest forward P/Es, at 22.7, near an all-time high. Within the industry, Visa and MasterCard trade with forward multiples above 25.0, while WesternUnion has more pessimism priced in, as its shares trade at 10.7 times next year’s expected earnings.
 
Blockchain still needs to show that it can grow to the size of Visa’s or MasterCard’s networks. But there are certainly many smart folks throwing a lot of money at the technology, which may one day prove disruptive.


Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.

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EdwardYardeni
With a new year only a couple of weeks away, it seems an opportune time to look at what disruptive innovations could shake up established players in 2016 and beyond.
battery, blockchain, bitcoin, tesla
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2015-34-17
Thursday, 17 December 2015 07:34 AM
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