What makes a tech company disruptive?

Fidelity's Ali Khan explains the difference between technology that's revolutionary vs. truly disruptive.

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There’s a difference between technologies that are revolutionary and those that are truly disruptive, according to one Fidelity fund manager. The latter is a threat to displace established market leaders in their respective industries.

“To me, disruptive tech companies are the ones I believe can change the status quo over time, due to better business models that reimagine the way products and services are delivered to customers,” says Ali Khan, analyst for Fidelity® Disruptive Technology Fund (FTEKX) and co-sector leader of the Technology team.

“Think of the way Uber (UBER) and Lyft (LYFT), 2 investments in the fund as of September 30, have changed the way people share rides,” Khan says. “By using algorithms to match riders with gig-economy drivers, I think these companies have the potential to take share from taxi and livery companies in coming years by driving down costs and, in many cases, creating positive customer experiences.”

Khan also is on the lookout for companies with disruptive technologies that can help their customers grab and lift boxes in a warehouse, assist surgeons in delicate operations, or even drive your car, to name just a few examples.

“Many of these operations require semiconductors, so we’re invested in the chip companies we think are pushing the boundaries with ever-smaller form factors, 3D intelligent sensors, and chips that can support expanding needs for artificial intelligence, big data, and the internet of things,” he explains.

Khan adds that some of the fund’s investments are in growing tech companies he thinks have very large addressable markets and, therefore, could use disruptive technologies to gain market share over time.

For example, the fund held several smaller application software names at the end of the third quarter, including HubSpot (HUBS), which employs an innovative education, training, and sales process for its relationship management software, and Zendesk (ZEN), which offers an online system to help companies solve helpdesk tickets faster.

“In my view, none of the fund’s holdings are involved in the old way of doing business, and that’s exactly why we like them,” Khan says. “Investing in only these types of companies is what I think makes our fund unique.”

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