Take a good look at the chart below. It’s called the Gartner Hype Cycle. It’s so named because it represents the distilled learning of the research group Gartner on the trajectory of new technologies from inception to adoption and on to commercial success.
In equity research, it is used to describe the movement of markets and sectors as well as individual stocks.
It provides an elegant exposition of the boom-bust-and-boom of digital technology stocks over the last quarter of a century.
You spy the ‘innovation trigger’ of the internet in the 1990s followed by the irrational exuberance that led us to 2000, the ‘peak of inflated expectations’. After that was a market meltdown scarier than the Oblivion ride at Alton Towers.
Once investors licked their wounds (and navigated the ‘trough of disillusionment’), the digital economy reconstituted itself like Arnie as the Terminator, creating titans such as Google, Facebook and Netflix. Meltdown survivors Apple, Microsoft and Amazon transformed to become three of the world’s largest companies.
What the digital economy has managed is to push the ‘slope of enlightenment’ way, way beyond the 2000s peak of inflated expectations.
That in itself may be cause for concern, but it is not germane here.
I was reminded of the Gartner Cycle when it came up in an online discussion around investor interest in and sentiment towards the multi-billion-dollar human microbiome industry, which is developing drugs and functional food ingredients derived from ‘good bacteria’.
One delegate suggested that, after the recent upheaval, the sector is currently on the ‘path of enlightenment’ after hitting a ‘peak of inflated expectations’.
This may be a little optimistic with shares in market leaders such as Seres Therapeutics (NASDAQ:MCRB), 4D pharma PLC (AIM:DDDD, NASDAQ:LBPS) and Finch Therapeutics Group Inc bobbling around their recent lows.
For the opportunist, these rock bottom valuations are no bad thing. They mean our three growth stocks have moved from being overbought to oversold (and remain so) if you accept the industry fundamentals remain intact (and that the hype cycle is predictive).
Gartner’s graphic will have some resonance too with investors in and management of OptiBiotix Health PLC (AIM:OPTI), a UK microbiome pioneer.
Excitement around the sector drove the shares up to a peak of 120p in 2019 in fairly volatile fashion – and on little more than expectation.
Ironically, today, with the share price at 45p (and presumably in the Gartner trough), OptiBiotix is a company with strong fundamentals, a burgeoning revenue base, and expanding profit margins.
Not only that, the company’s products and ingredients for weight management, nutrition and cholesterol reduction are available in 160 countries around the world via distributors, supplement makers and retailers. It has inked some significant deals with impressive commercial partners.
If the Gartner Cycle tells us anything, then it’s that these lows are transitory once rational market expectations are restored. Investors in OptiBiotix, along with those in Seres, 4D and Finch, will be hoping 2022 heralds an era of enlightenment.