Goldman sees 'creative destruction' in these businesses
3D printing could literally break the mold; a growing new asset class threatens the reinsurance industry, and E-cigarettes aren't just blowing smoke at tobacco titans.
These are among eight industry themes that Goldman Sachs analysts described as "creative destruction" - trends that are big and disruptive enough to reshape industries and draw in an increasing number of investors.
Cancer immunotherapy. LED lighting, natural gas engine technology, software defined networking and big data are among the trends Goldman analysts see as mega trends that will change the behavior of consumers and force companies to "adapt or die."
(Read more: Innovation welcome. disruption required)
The analysts likened these innovations to the sweeping changes that brought about the fall of Polaroid's instant camera business, and the rise of Wal-Mart. The Goldman analysts declined to be interviewed on their report.
As for E-cigarettes, sales have doubled in the last two years and are closing in on $1 billion, and Goldman says they are 99 percent less harmful than tobacco cigarettes, provide a similar experience and are cheaper.'"We estimate that e-cigs could reach $10 billion in sales over the next several years...and account for more than 10 percent of total tobacco industry volume" and 15 percent of the total profit pool by 2020, wrote analyst Judy Hong.
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Lorillard is seen for now as the biggest beneficiary of the trend among big three tobacco companies since it purchased Blu e-cigs, a company that has 40 percent of the e-cig market. NJOY and Logic, both private e-cig companies, would be beneficiaries. While too soon to conclude, Altria could be the most at risk, due to its majority share of the cigarette profit pool and its ownership of top brand, Marlboro. Risks to this innovation could be changes in tax status or regulation, such as FDA oversight.
Cancer immunotherapy has broken out as the big story in pharma. Goldman analysts project it will be a $10 to $15 billion business by 2025 in melanoma, lung and renal cancer, but say that could be just the start. The drugs basically work by "re-training" the immune system to kill cancer, instead of traditional chemotherapy which sets out to stop cancer cells but also can damage other cells. They expect the drugs to be used in combination therapy.
(Read more: Cancer Immunotherapy the Top Focus at ASCO)
Bristol-Myers is the leader with phase three trials in three types of cancer and a one to two year lead on other drug makers, so it should be able to secure a large share of the market, the analysts noted. Merck has a mono-therapy therapy, PD-1, which shows strong early stage response, and it is looking to other immunotherapy agents to potentially partner with it, but Bristol has a significant lead, the analysts note.
Goldman analyst Brian Lee sees a bright future for LED lighting. LEDs have gone through several transformations, starting with the handsets in the early 2000s, moving on to TVs, and now progressing to general lighting. Lee writes that this is a multi-decade opportunity for a product that will have clear cost and energy savings advantages.
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LEDs have a longer lifetime of 50,000 hours, and could have 80 percent penetration by 2025, he notes. Demand is now in the early stages but the general lighting market is large - $11 billion. LED is about five percent of the market and it is being driven by industrial and commercial demand. Goldman believes Cree is the most attractive play and it has a technology advantage. Taiwan-based Epistar is a key player in the Chinese LED market. Goldman is neutral on the stock but it could see EPS growth of near 40 percent in 2013/2014.
Risks include slower adaption of LED lighting in general, a new technology or positive developments in conventional lighting.
An innovation in the capital markets is putting the reinsurance industry at risk, Goldman analysts note. The threat comes from pensions and other traditional investors that are starting to put money into property-catastrophe reinsurance in search of higher yields. While early in the trend, Goldman expects it to grow. Catastrophe bonds are the biggest component of alternative capital, but it sees growth in such things as industry loss warranties.
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"We believe that if pensions step up their participation by allocating a fraction of their portfolios to this area, reinsurers' ability to generate attractive risk-adjusted returns alongside this new capital could be permanently impaired," they wrote. Goldman reiterated its sell rating on Partner Re and RenaissanceRe
Goldman sees rate pricing as a threat to reinsurers because third-party investors can evaluate property catastrophe risk, based on their overall portfolio and may accept lower returns than traditional reinsurers. This could affect the ability of reinsurers to get rate gains after large losses.
As alternative capital moves into the market, traditional reinsurers will need to adjust by redeploying capital, they noted. For instance, Berkshire Hathaway, a larger writer of property catastrophe risk, recently said it would branch out into the excess and surplus insurance market, and start a new quote share relationship with AON.
(Read more: Who Paysfor Catastrophes?)
As natural gas develops in the transportation sector, Goldman sees Cummins as the most attractive company because of its spark-ignited engine technology, which is the lowest cost engine for the trucking industry. Goldman has a sell on Westport, which is in joint ventures with Cummins and Weichai, but its primary profit center, the Cummins Westport JV - expires in 2021 and Cummins would retain the long term economics. It also sees issues with Westport's lack of distribution scale.
Goldman mentions Clean Energy Fuels as the largest provider of natural gas fuel for transportation and Chart Industries, which makes prouducts for LNG storage, but it does not cover the companies.
The software networking industry could be about to shake up traditional networkers. Goldman analysts note that while the rest of tech has moved into the era of cloud computing, networking equipment has not and is "stuck in a decade-old paradigm built around integrated hardware and software 'boxes' that are configured manually and can't scale."
(Read more: Cloud Computing: CNBC Explains)
Cloud computing has replaced the client-server paradigm of the 1990s, and now the transition in software could take place slowly over five to 10 years, in part because networking has long replacement cycles. Companies are also risk adverse to the potential for network failures from new unproven technology.
The analysts said they believe large enterprises and services providers are in the testing phase through next year and will begin deployment in 2015. Cisco was at risk to the trend but has now positioned itself positively through acquisitions, partnerships and research and development. Juniper and Brocade lack scale in Ethernet switching and are not as well positioned, they noted.
3D printing has the potential to offer lower costs for complex designs, as well as lower overhead for parts and products. It also makes it far easier to customize, compared to traditional manufacturing and prototyping methods. A 3D printer can be superior to a cast or mold that makes just one part of a specific design, since it can print many versions of a design, lowering the upfront costs.
(Read more: 3D printing and the cool stuff it makes)
3D printing is being embraced by the auto industry, medical industry and aerospace. Goldman analyst Cristina Colon pointed to a 25 to to 50 percent cost savings per part when Boeing printed 300 different airplane parts, and she expects it to become increasingly important for end parts production.
Costs are coming down with products for consumers hitting the market at around $2000 and as low as $500. Goldman does not cover the 3D companies but it notes that Stratasys is the largest vendor in terms of unit shipments. It merged with Objet and now has half the industrial market.
3D Systems had an 18 percent share in 2012 and is the second largest vendor.
Big data from social media, web logs and elsewhere is creating a boom in data, and traditional data warehouses are limited. Teradata, buy-rated by Goldman, is seen as the most exposed to the big data trends and is well positioned to take advantage of the trend. Informatica launched power center for big data and Facebook and Open Table are users. Goldman rates that stock as neutral.
—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.