Out with the old, in with the new? Industries at risk from disruptive innovation

Which sectors will experience change quicker?

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Cathie Wood and the ARK Invest research team identify five industries and sectors most at risk of disintermediation and disruption.

Physical bank branches

Digital wallets – bank branches in user pockets – are rendering expensive physical infrastructure useless, putting at risk hundreds of billions dollars of traditional financial institutions' assets.

The declining use of bank branches and corresponding growth in digital and mobile banking has been well documented. Digital-only challengers such as Square's Cash App, PayPal's Venmo, and Chime are benefiting from this change.

In the past four years, Chime added 5.5 million checking account users, while monthly active users (MAUs) on Venmo and Cash App rose by 32 million and 30 million respectively. Square's active Cash Card users increased by 7 million during the same period.

We believe digital wallet users could become more valuable than the checking account customers of a traditional bank such as Wells Fargo within three to five years.

While banks are closing branches and investing in digital services at a rapid pace, this transition may not happen fast enough to avoid the loss of significant shareholder value.

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Brick and mortar retail

In-store retail sales in the US peaked in 2015 and have been tailing off since. The pandemic accelerated the adoption of e-commerce in the US from 11.3% of retail sales at the end of 2019 to 16.1% in the second quarter of 2020, the largest quarterly jump in history.

We expect the adoption of drone-assisted delivery in the next few years will dramatically lower shipping costs, driving even more consumer purchases online.

As a result, ARK estimates that US e-commerce will grow from $820bn in 2019 to $2.7trn in 2025, pushing non-e-commerce retail down from $4.6trn to $3.9trn, a level last seen in the late 1990s.

While some companies will transition successfully to e-commerce, we expect more bankruptcies during the next five-to-ten years as not every business will survive or make the shift quickly enough. This brick-and-mortar retail apocalypse will likely continue to impact both equity and fixed income holders.

We estimate $2trn in enterprise value is at risk in the public equity markets across retail categories with heavy real estate footprints, such as luxury goods, footwear and accessories, apparel retail, specialty retail, department stores, and apparel manufacturing.

Retail-related fixed income investments also could suffer as retail real estate values decline.

Linear TV

While linear TV (real-time programming accessed over the air or by cable/satellite at scheduled times) is still the primary delivery method for live programming, this model is rapidly giving way to over-the-top (OTT) services that deliver on-demand and live programming via the internet.

The availability of on-demand viewing services, including Netflix and other streaming services such as Disney+, HBO Max, and Amazon Prime Video, provide better economic value and user experiences, such that linear TV providers are suffering from cord cutting at an accelerated rate. Without sports, the pace of cord cutting intensified during the pandemic.

Since peaking in 2011, the number of US linear TV households has been declining at an annual rate of 2.1%, and we believe that will accelerate to 15% at an annual rate during the next five years.

As cord cutting accelerates, we believe $442bn in linear TV subscription and advertising market capitalisation is ripe for disruption.

Freight rail

Since the early 2000s, freight rail has been taking share from trucking while increasing prices.

However, we believe in the next few years, autonomous electric trucks will commercialise and take share from rail operators with more cost-effective, door-to-door service.

We expect autonomous electric trucks will reduce the cost of trucking from 12 cents per ton-mile to 3 cents over the next five-to-ten years, undercutting rail prices with the help of lower electricity and maintenance, as seen in the graph above.

If other forms of autonomous vehicles are added to the mix, such as flying drones and rolling sidewalk robots, freight rail companies may have trouble competing with antiquated technology tied to dedicated infrastructure assets.

Traditional transportation

Autonomous electric technology – specifically robotaxis – will cause a tidal wave of disruption across many industries.

As battery system costs decline, we believe electric vehicle (EV) prices will follow, triggering mass market adoption. Autonomous taxis may therefore become the dominant form of personal transportation in urban areas.

Robotaxis could eliminate the need for many consumers to purchase personal vehicles, leading to plunging auto sales and auto insurance rates, and rising defaults on auto loans.

Car dealerships could also become casualties and ride-hailing companies, once disruptors themselves, could see ride-hail take rates fall from 20%-30% today to 5% or less as autonomous technology platform providers capture the difference.

We believe the impact will be felt beyond just the auto industry. Passenger air traffic could decline, as robotaxis should offer more cost-effective and convenient door-to-door service alternatives to one-to-three hour flights.

Low-cost autonomous ride-hailing services also could displace many forms of public transit, including trains, buses, and ferries.

Traditional transportation (cont.)

Finally, oil demand has likely peaked. As declining costs accelerate demand for electric vehicles, we believe we may see EV penetration of 20% by 2022.

At the same time, because of higher capacity utilisation for robotaxis, electric miles could account for some 40% of total passenger auto miles traveled in 2025.

Taking all these factors together, robotaxi disruption is likely to up-end the traditional world order in transportation. We estimate that roughly $8trn of enterprise value in the public markets is at risk.

Cathie Wood
20 November 2020

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As investors seek the next 'great idea' to add to their portfolios, they should be equally diligent in identifying 'bad ideas' - companies or entire sectors that likely will be rendered irrelevant by seismic shifts in technology, market dynamics or customer behaviour.

To help investors stay on the right side of change, Cathie Wood and the ARK Invest research team has identify five industries and sectors most at risk of disintermediation and disruption.