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One megatrend that has played out over and over again for centuries is the replacement of labor by automated machine processes. This has happened in agriculture, manufacturing, and the service industry. Though many of the positions that have been made redundant are considered low-skill, there are many supposedly safe, high-skill jobs which could easily be automated or outsourced under the right circumstances. Which tech stocks stand to benefit from such changes? Are any of them trading at reasonable valuations?

How Disruptive Changes Happen

Disruptive technologies can exploit economic opportunities when the following societal barriers are broken down together: cultural barriers, legal & regulatory barriers, and technological barriers. Believe it or not, these are listed in descending resistance to change since cultural barriers are the hardest to break down and technological barriers are the easiest to break down.

This may seem counterintuitive, but it will become obvious after considering some well-known examples of disruptive technology. First, consider online retailing or "etailing." This technology has been widespread since the tech boom, but has only recently become a potent destroyer of brick-and-mortar businesses. Apple's (NASDAQ:AAPL) iTunes store and Amazon's (NASDAQ:AMZN) online presence present lower-overhead business model with fantastically deeper inventories than a physical retailer ever could. Despite this obvious superiority, casualties among mainstream brick-and-mortar retailers did not manifest for years. For example, Circuit City filed for bankruptcy in November 2008, not in 2000 at the height of the tech boom. Borders Books filed for bankruptcy even later in February 2011. Why did this change take so long? In this case, it took almost a decade for consumers to become comfortable making regular purchases online with credit cards.

Why was there a decade-long wait between mainstream online business and its dramatic impact on these big box competitors? Ultimately, consumer behavior did not change overnight. There were no substantial legal or regulatory barriers to these consequences and the technology existed for years - an eternity in light of the rapid pace of change in computing technology. The missing ingredient wasn't technology or legal reforms, it was culture.

Professionals are Not Immune

Remember travel agents? They were very useful for coordinating flights, hotels, and other travel arrangements before the internet revolution made such information readily available. Now anyone can make travel plans using Expedia (NASDAQ:EXPE).

Real estate agents, professors, and even doctors could become as threatened as travel agents by the widespread use of new technologies. There are many companies which are trying to develop and deploy the technology to provide substitutes for highly paid professionals.

Some of the surgery done by human beings could be done with higher precision by machines. Intuitive Surgical (NASDAQ:ISRG) markets devices which translate the natural hand movements of doctors into tinier machine motions for microsurguries. Conceptually, a surgeon could be located across the globe. This company could allow surgeons to be outsourced much like x-ray analysis has been outsourced. At $538 per share equity in this company is rich on a price-to-sales basis since shares trade at a 10.88 multiple, incredibly higher than the 1.32 the S&P 500 average. Intuitive Surgical shares are trading at a lofty 38.32 price-to-earnings ratio, a price multiple that is almost three times the 14.23 PE ratio of the S&P 500. This stock is clearly richly valued.

Fortunately, a growth-at-reasonable-price opportunity is available through the purchase of WebMD Health (NASDAQ:WBMD) stock trading around $14.20 per share. The shareholders of this healthcare information services industry small cap stock have suffered a -62.1% drop in price over the past year. Today, the firm's 1.41 price-to-sales ratio is in line with today's prevailing market multiples. Though its hares are trading at a high 56.92 price-to-earnings ratio, it price-to-book multiple is 1.39, cheaper than the 2.07 S&P 500 average. Investors should consider this number to be an upper estimate because the price-to-book ratio fails to account for internally-developed intellectual property including patents, brands, and trademarks. If the economic value of these assets were even partially recorded on the balance sheet the firm's price-to-book ratio would be lower. Analysts expect that the firm's earnings growth will accelerate with five-year estimates at 16.7% per year.

The ultimate use of WebMD would be to fully or partially automate initial diagnoses. This would drastically reduce the need for general practitioners and nurses who repeatedly ask you to explain your ailments. These people are the health-care equivalents of travel agents. They typically don't administer treatments but instead refer you to a pharmacist or a specialist. Similarly travel agents didn't clean hotel rooms or fly planes. Like travel agents, general practitioners and many nurses serve as gatekeepers for healthcare treatment. WebMD could effectively automate the gatekeeper role in healthcare.

It is unclear whether the widespread use of WebMD's information services seems like a much more likely story than surgical oursourcing by Intuitive Surgical. Intuitive Surgical would require locating cheaper or better surgical talent overseas and the deployment of their devices. In contrast, WebMD would mostly require that healthcare customers use their products on their computers and mobile devices to manage their healthcare information. Unfortunately, widespread use would require a cultural shift in the doctor-patient relationship and some openness to change by doctors. Don't hold your breath.

Conclusion

WebMD offers valuations with as a whole are more attractive than those of Intuitive Surgical. Moreover, WebMD would require less capital expenditure if it ever needs to achieve scale for widespread use. However, investment in either company should be tempered with the wisdom that disruptive change requires more than just technology.

Please read the article disclaimer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: WebMD: A Potential Game Changer