Which Stocks in Your Portfolio Will Be Disrupted?

Generative artificial intelligence (AI) has placed us on the brink of a major disruption cycle. This isn’t breaking news—anyone who has experimented with consumer-facing AI tools can see the potential.

Many industries will be severely impacted. Some will benefit from massive productivity boosts, while others may face extinction.

Are investors paying enough attention to the disruption risk posed by generative AI?

Technology Companies at Constant Risk of Disruption

Technology companies are at constant risk of disruption. This is the nature of the industry. IBM and Dell disrupted Apple. Apple disrupted Nokia and Motorola (and many others). Instagram disrupted Facebook—fortunately for Facebook, it owned Instagram. Nvidia disrupted Intel. You get the picture.

Disruption Can Lead to Catastrophic Loss

The risk of disruption in the technology sector is most evident when you look at the percentage of companies in a sector that experience catastrophic loss. JP Morgan keeps the statistics on this. From 1980 to 2020, 59% of firms in the technology sector experienced catastrophic loss, compared to 44% for all sectors. Catastrophic loss is defined as a loss of 70% from peak levels that aren’t recovered.

Synthesia: Turning Text into Video Presentations

I came across a Barron’s article today that reported on a company called Synthesia. Synthesia allows users to turn text into video presentations using AI-generated avatars. Users can choose from stock avatars or create an avatar that looks and sounds like themselves. The author posted an AI-generated video of himself talking about the article. If you have a subscription, check it out here. The video is impressive.

Reading about Synthesia made me think about Adobe. Adobe has been the dominant software package for graphic design, video production, and digital creations for as long as I can remember. This is a big business. Adobe does almost $20 billion in annual revenue and has a market value of more than $200 billion.

Will Generative AI Disrupt Adobe?

With generative AI image creation improving at a rapid pace (ChaptGPT’s latest model is a marked improvement over the last), many basic graphic design projects may no longer require one of Adobe’s programs. And now with Synthesia AI allowing users to create text to video presentation, you can see another segment of Adobe’s customer base shrinking.

Perhaps Adobe will acquire Synthesia or develop similar technology to stay ahead. My goal isn’t to pick on Adobe, but to point out that risks are emerging for entrenched long-time winners as the generative-AI disruption cycle gets underway.

Savvy investors are busy evaluating disruption risk now more than they have in years. Are you prepared for the generative AI disruption cycle? Perhaps it is time to take a close look at your portfolio.