The share price of loss-making Tesla sharply rose from around $30 in Jan 2020 to over $400 by November 2021—almost a 14X gain in just over two years. But it fell to $123 by January 6, 2023. Through this inflation and deflation cycle, general investors lost billions of dollars. Unfortunately, Tesla’s stock and many other technology stocks have been showing such behavior—causing massive Wealth accumulation and vaporization within a brief period. Due to the frequent repetition of such a reality, it has gained a name—Hype Cycle. It is also called the SPAC Hype Cycle or Pattern, or Gartner Hype Cycle.
Unfortunately, often, small investors are the sufferers. They have been losing their hard-earned savings to the manipulation game of big players. And it has been mostly happening due to the lack of understanding of technological Innovation dynamics. It does not necessarily tell that no technology stock has long-term potential. For example, many small investors became millionaires by holding small-quantity stocks of Xerox, Microsoft, and Apple. By the way, unlike Tesla, all of these technology success stories appreciating stock price, in the long run, have also been offering lucrative cash dividends. For many, such a cash dividend is good enough for retirement income.
Perhaps technology stocks have shown a solid track record of appreciating prices and offering attractive dividends. However, that does not necessarily mean that holding any technology stock, irrespective of hype, will deliver profitable returns down the road. For example, Uber has been showing no signs. Similarly, will every Tesla stock cross its peak and pay an attractive dividend? Similarly, will the stock price of Vietnam’s VinFast, Tesla’s real EV maker, ever cross the peak and deliver a sustained profit? Such reality raises questions—how to comprehend? When to enter and exit? Is it just luck?
Genesis of Hype Cycle
Rise and Fall burns investors in familiar SPAC Pattern has become a cause of concern. Why do technology stocks show such behavior? How to detect and avoid inflation and the disillusion segment of the life cycle appears to be a burning issue for small investors. Once small investors succeed in doing so, many retirees will avoid the bite of sharks.
A few buzzwords like disruptors, Disruptive innovation, radical innovation, magical innovators and Creative waves of destruction are used to manipulate the ignorance of small investors about technology innovation dynamics. Yes, disruptive innovation is a powerful force that enables small Startups to rise and unleash disruptive innovation effects on incumbent high-performing ones. Hence, investors must detect the rise and fall and relocate their investments accordingly.
For example, many investors avoided the rise of digital imaging, personal computers, and other waves. As a result, they suffered from staggering losses by holding stocks of Kodak or Mini computer makers and being late to invest in stocks of Microsoft, Apple, Sony, Intel, and many others. Similarly, by keep holding stock of Intel and avoiding the holding of TSMC stock, riding on disruptive innovation force for Intel, lost the opportunity of profiting from the rise of the pure foundry semiconductor business. Such a reality has created nervousness and insecurity among small investors. Unfortunately, stock sharks are after them by giving birth to the hype cycle. For example, they created a hype cycle by terming Tesla, Nvidia, or Vietnam’s VinFast as disruptors.
At the root of the hype cycle is the reinvention dynamics. Reinvention waves fuel creative waves of destruction and disruptive innovation, giving birth to disruptors. Consequentially, investors holding stock of mature profit-making companies suffer from sudden erosion of market value, while stock holding of new entrants driving reinvention wave profit from rapid appreciation.
All technological products have dynamic life cycles. They have been evolving in episodic form. They become susceptive to reinvention after reaching the maturity state of S-curve-like life cycles. For example, after 100 years of growth, the film reached maturity and became a target of reinvention in the 1970s. Similarly, keyboard-based personal computer interfaces became the target of reinvention in the 1980s. There have been many such examples, from land phones to music players.
Despite the initial success and greatness, invariably, all technology cores powering innovations reach maturity. Due to diminishing progression, innovation improvement and diffusion slow down. Fortunately, changing the technology core resulting in reinvention gives birth to new waves, with the potential of offering better and cheaper alternatives. For example, the change of film by electronic image sensors and physical wire with wireless connectivity gave birth to digital camera and mobile phone reinvention waves. Similarly, replacing liquid fuel and internal combustion engines with electric motors and batteries has given birth to battery-operated electric vehicles (BEVs).
Irrespective of the long-run possibility, invariably, all reinvention waves begin the journey in embryonic form. They must keep growing to cross the threshold for unleashing the creative destruction force. But do they always succeed? Even if they do, how much technological advancement, lead time, and investment will be needed? Furthermore, there has been a race between multiple firms in driving the reinvention waves. Even upon crossing the threshold, not all of them will reach profit. Such a race has a Natural tendency of monopoly—winner takes all. Hence, although the BEV reinvention wave has yet to cross the threshold, not all BEV makers will reach profit. Besides, incumbent automobile companies like Toyota also have a chance of winning the race due to pursuing alternative routes and having a solid technology-advancing base.
Manifestation of the embryonic beginning of reinvention waves into radical innovations—what it takes?
No radical or disruptive innovation does show up suddenly. By advancing the technology core, they must grow in creating scale, scope, and positive externality effects. Hence, how far the technology core is amenable to progression and which potential disruptors have a strong base of advancing have significance in predicting the future. Besides manufacturing capability, selling them at a loss and capturing market share through subsidies are not the underlying success factors for reaching profit and winning the race. Unfortunately, such parameters are used to make valuations for inflating the stock price of new entrants engaged in reinvention waves.
Ironically, the purpose of such inflation is not due to the demand of holding those stocks and benefitting from dividends. Instead, the greed of selling them at inflated prices to small investors is the underlying reason. For example, the average holding period for VinFast stock recently was less than two days, creating a reoccurring SPAC pattern. The hype cycle inflates due to the buying of large quantities of stock of believed to be disruptors by large traders, followed by deflation caused by quick selling to small investors. Why do small investors fall into this trap? Because they are incapable of understanding reinvention dynamics and predicting the winner, resulting in wrong investment decisions. Yes, small investors must respond to reinvention dynamics. They must relocate investment and take a position in the new wave, likely unleashing disruptive innovation effect. However, all the reinvention waves do not succeed within a specific time frame. Besides, not all the firms chasing the reinvention wave will also succeed. Hence, the focus should be on understanding reinvention dynamics for making rational decisions to avoid the burn from the hype cycle.