"We wanted flying cars and settled for 140 characters," declared PayPal founder Peter Thiel in a recent speech at the Manhattan Institute.
His point? Innovation is Silicon Valley is sorely lacking right now:
Instead of creating flying cars, our smartest entrepreneurs and engineers built Twitter. And instead of aiming to cure cancer, they’re building video games.
As I explained during a recent appearance on Fox Nation, Silicon Valley has failed to produce a truly breakthrough technology in the last decade.
Sure, plenty of software startups have earned multi-billion-dollar valuations. But as soon as they hit the public market, they’re imploding.
Today I’ll tell you what’s going on here…
And then I’ll reveal why it’s creating a major investment opportunity for you.
The Busted Status Quo
In recent times, Silicon Valley has largely focused on software companies.
Although no one can argue with the convenience of companies like Uber and Dropbox, software-based companies have their limits. Perhaps that helps explain why so many recent software IPOs are “busted.” Consider, for example:
- Uber (UBER): down ~40% since its IPO.
- Slack Technologies (WORK): down ~50% since its IPO.
- Lyft (LYFT): down ~41% since its IPO.
You see, by its nature, software can’t be more powerful than the hardware it runs on.
And that leads us to a simple conclusion:
True innovation requires new types of hardware.
There Is No Chicken & Egg Here
Hardware is the key for technology progress — and the key for societal progress.
In his recent speech, that was Thiel’s thesis.
- Without the innovation of super-fast, super-efficient semiconductors (hardware), artificial and machine-learning applications (software) wouldn’t be possible.
- Without the innovation of optical switches (hardware), lightning-fast Internet and cloud computing services (software) wouldn’t be possible.
- And without the innovation of smartphones (hardware), the $1 trillion+ app economy (software) wouldn’t be possible.
There is no question here about the chicken and the egg:
Hardware innovation always comes first.
And when it comes, it can lead to huge waves of value for investors — for example:
In the lead-up to the next generation of optical switches in 2017, Applied Optoelectronics (AAOI) was trading at a bargain-basement valuation of 9x earnings. But once the new hardware was released, its shares went on an 881% tear.
And just consider the profits that investors in Apple have earned as its smartphones soared in popularity — and its stock soared from about $2 to $266.
So why is Silicon Valley so focused on software startups?
“Hardware is Hard”
As venture capitalist Marc Andreessen famously said, “Hardware is hard.”
And it’s expensive, too…
My research shows that hardware innovation generally requires an upfront investment of $100 million or more before the first marketable product can be launched.
What’s more, developing a truly innovative technology can take at least a decade.
This long timetable and large capital commitment doesn’t suit Silicon Valley.
Most venture capital funds would rather invest a few million into a software startup that can start generating revenue almost immediately — and get acquired or go public fast.
But perhaps surprisingly, there’s an upshot to all this that directly benefits you.
Undervalued Hardware Opportunities Hiding in Plain Sight
Thiel’s suggestion that innovation is dead isn’t quite right.
You see, based on patent filings, it’s alive and well. Last year, global patent filings increased 5.2% to a staggering 3.3 million.
That’s 3.3 million innovations, many of which were hardware innovations.
The problem is that, as you learned a moment ago, hardware is hard.
And as a result, raising capital for hardware ventures is more challenging, and that means the valuations for such ventures tend to be very low.
And here’s how this impacts you:
I’ve recently identified a few publicly-traded hardware companies with legitimate breakthrough technologies — and their valuations are far too cheap right now.
When their innovations are launched, I believe the stocks of these companies will soar.
And in next week’s column, I plan to share at least one of them with you.
So stay tuned!