What Is an Emerging Industry?
Let me explain to you what an emerging industry is—it's essentially a group of companies that come together around a new product or idea that's still in the early stages of development. These industries usually start with just a handful of players and are often built on cutting-edge technology. They tend to emerge when a newer technology starts to overshadow and replace an older one.
When you look at stocks in these emerging industries, they're often quite volatile, with prices swinging wildly. Valuing these companies can be tricky, especially if they're not generating much revenue or haven't turned a profit yet. As an early investor, you might hope to catch the next big thing like Google or Apple, but I have to tell you, the risks are substantial.
Key Takeaways
- An emerging industry refers to companies that are formed around a new product or idea that is in the early stages of development.
- Companies that are in emerging industries must overcome many barriers to entry if they are to become profitable.
- These barriers may include the lack of sufficient funding, the inability to take advantage of economies of scale, government restrictions, and competition from established companies.
- Examples of current emerging industries include artificial intelligence (AI), robotics, virtual reality, self-driving cars, and biotechnology.
- Several exchange traded funds (ETFs) have been created to enable investment in emerging industries while reducing some of the risks associated with investing in these new sectors.
Understanding an Emerging Industry
It can take years for an emerging industry to become profitable, and in the beginning, companies pour most of their resources into research and development. Marketing costs are also high because the product or service is new and untested—you have to convince both investors and consumers of its value. Investing here is a high-risk, high-reward game, and that's something you need to consider directly.
Barriers to Entry
Barriers to entry in these industries are often steep due to the expertise needed to compete. Think about scarce resources for manufacturing, the challenge of achieving economies of scale, securing enough financing, dealing with government regulations, and facing off against established competitors. Despite this, many new players jump in to grab an early edge—they raise funds if possible, hire top talent, and bring on key advisors. But a lot of them find out they lack the skills or money to actually get a product to market, and they end up failing.
Examples of Emerging Industries
Back in the mid-1990s, the internet was a prime example of an emerging industry. Hundreds of companies sprang up to capitalize on it, leading to the dotcom bubble where speculation drove a tech stock boom. Venture capitalists threw money at startups, some without any real product. By 2001-2002, the bubble burst, and many companies collapsed. But survivors like Amazon and eBay thrived and set the standard for the internet industry.
Today, we're seeing similar patterns with AI, virtual reality, and self-driving vehicles—these are like the next wave after the internet. Only a few companies with deep pockets and strong intellectual property are leading so far. Biotechnology is another one, with advances in immunotherapy and gene therapy marking it as an emerging field or at least one hitting a growth turning point.
Special Considerations
If you're looking to diversify your portfolio with emerging industries, the risks of betting on early-stage companies can be off-putting. That's where exchange-traded funds come in—they focus on specific sectors and help spread out the risk. For instance, there are ETFs for AI and robotics, blockchain technology, and biotech firms advancing in medicine, pharmaceuticals, and genetics. This way, you can get exposure without going all-in on one unproven company.
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