Innovation or illusion? How to spot the real disruptors (and 4 ASX ideas)

We all love a compelling growth story, but how do you tell whether you're buying substance or sizzle?

In this episode, we’re diving into one of the most exciting - and sometimes most dangerous - areas of the market: innovation. 

It’s a word that gets thrown around a lot, but how do you tell the difference between a company with a slick marketing pitch and one that’s genuinely building something transformative? 

To unpack this, Livewire's Chris Conway is joined by Steve Johnson from Forager and Martin Hickson from 1851 Capital.

Johnson and Hickson share what innovation means to them, the traits that set true disruptors apart, and the red flags that suggest hype over substance. They also cover how to assess competitive moats, and what metrics matter when profitability hasn't quite yet arrived. 

Of course, it wouldn't be an episode of Buy Hold Sell without some stock ideas, so the guests each share an ASX innovator that is underrated and the market might be missing, as well as the best innovator across any market cap segment.

Please note this episode was filmed on 10 September 2025.

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Edited Transcript

Chris Conway: Hello, and welcome to Livewire's Buy Hold Sell. My name is Chris Conway. Today, we're going to zero in on the innovators and talk about how to separate the companies with a good marketing story from those doing something truly bold and potentially game-changing. To help with that, I'm joined by Steve Johnson from Forager and Martin Hickson from 1851 Capital. Gents, welcome to Buy Hold Sell.

Martin Hickson: Thank you. Good to be here.

Steve Johnson: Great to be here, Chris.

Chris Conway: You've both been around long enough to know the difference between a good marketing story and you're able to separate hype from reality. Steve, I'll come to you first. I just wanted to ask what innovation really means to you?

What is innovation?

Steve Johnson: I'm not sure what you're trying to say there, Chris. Are there a few grey hairs on my head? We're in an environment at the moment that I think there's probably more noise and fluff out there than there is real genuine innovation, so people need to be careful about all this sort of stuff. I think for me, innovation is just getting better at doing things, offering solutions that are better than what you were doing before. And I think that comes in some ways that are not necessarily intuitive.

There's obviously better products and selling something that's a new version or it's a different product, but also just getting more efficient. I think JB Hi-Fi (ASX: JBH) has been a really innovative company over a long period of time, and what do they do? They sell products cheaply and they innovate to sell cheaper and to give some of that benefit to the customers, and that's been a really, really powerful business model for a long period of time. So it's not just products for me, it's making your business better at whatever it is you do year after year after year.

Chris Conway: Martin, what about you? What does innovation mean to you?

Martin Hickson: When I think of innovation, I typically think of software or technology, a Life360, a Pro Medicus, but I think it's broader than that. It could be a business that's picked up an early trend - a data centre trend for example. We own a company called SKS Technologies (ASX: SKS), it was early on that data centre trend. They did all of the electrical work for data centres, the wiring. And that business's share price is up more than six times over the last 18 months. So early on that trend. So that's one example. Like Baby Bunting (ASX: BBN), they've got a new CEO there. He's doing some fantastic innovative things, new store formats, smaller formats, exclusive brands. So he's really driving profitability through innovation. So yeah, I think there's some of the things that we look at when we think of innovation.

Great, is it sustainable?

Chris Conway: Martin, I'll stay with you. How do you assess whether an innovative company has a sustainable competitive moat?

Martin Hickson: In small caps where we invest, management team is key. We spend a lot of time meeting company management teams. At 1851, we do over 1,000 company meetings per annum. Meeting management teams, working out what drives them, what their incentives are, what makes them tick, how are they going to grow a particular company? So that's the first point. Obviously, there are the financial metrics and what's the balance sheet like and how much cash have they got? If they've got cash burn, what are they burning out? What's their runway? What's the revenue growing at? What are their margins? What's the competition in the sector? So there's some of the things that we look at when assessing a company.

Chris Conway: Steve, what about you? Sustainable moat.

Steve Johnson: I'm very much a numbers guy. I'm not the best in the market at picking which of the people out there that I want to back, so I like to see evidence for it in the financial statements. There are probably a few things for me. I think R&D itself, and that comes with scale. So if you're much bigger than the next biggest player in the market, you can spend more of your profits on innovation. I think that's a really important one.

And increasingly these days, I think data is another source of innovation that is really sustainable. If you are gathering all of this information from your customers that lets you know what they want, know how to build that, give you the money to build it, then that's a really powerful one as well. So I like to look at those sorts of things. Sometimes that do actually turn up in the P&L as sustainable sources of competitive advantage in this area over time.

Burn baby, burn

Chris Conway: Steve, I'll stay with you. A lot of innovators, they burn a lot of cash trying to get to where they want to go. So what metrics are you looking at in terms of if they're not making profit yet, how do you assess the viability?

Steve Johnson: Again, I'm probably not too keen until I can see that inflexion point somewhere in the not-too-distant future, but some of the things that we monitor really, really closely are just the per customer metrics. So does this product make money for every sale that you do? And as we grow the sales, can I model that out and say, "Well, okay, I can see how the business overall can be profitable here?" We've seen examples where that's not actually the case. One.Tel was selling phone plans for less than it cost them to buy it, so the more they sold, the more money they lost, and that model worked like that. That's something I think those incremental economics look at. And then, lifetime value of a customer - it's something that's massively overused. People abuse it to try and tell a great story, but I think it's actually a metric that is the right thing for people to be thinking about here. You've done a sale, if this customer's going to stay with you for many, many years, you can work out what that customer is worth and whether that's profitable or not, and then as they scale, where is the tipping point here and how much cash are they going to need to get there?

Chris Conway: Martin, what about you? When it comes to that question of cash burn to scale, what does it look like and what metrics are you focusing on?

Martin Hickson: Yeah, very similar to Steve. We primarily focus on companies that are profitable already or they're turning profitable in the next 12 months. Typically, when a business is scaling up, a lot of the time it takes longer. It burns more capital than they expect. So we like to get them at that point right up in that inflexion point. But that's one of the primary things that we look at. Obviously, as I mentioned, the balance sheet is key, what level of cash that they're burning through at the moment, the unit economics, what level the revenues are growing at, the gross margins of the particular company. That's what we look at generally.

Stock picks – underrated ASX innovators

Chris Conway: All right, enough with the theory, we're going to get to a couple of stock picks. I've asked the gents to bring along their most underrated ASX innovator. That was a mouthful. Martin, I'll come to you. What's one you've got for us?

DUG Technology (ASX: DUG)

Martin Hickson: One that we own in the portfolio, a little technology company called DUG Technologies. The company listed around five years ago. It's done okay since listing, nothing too special. But the big change with this particular company is a technology or a product that they've got called Elastic MP-FWI. Now, I'm not a scientist, I won't go through the details of what it does, but what it does basically, at a high level, is it helps oil and gas companies better interpret seismic data so that they can make better decisions around where they drill.

Oil and gas companies spent hundreds of millions of dollars every year drilling for oil and gas. So being able to better target where they place those wells is very, very important. So this particular product is now over half the company's order book and they've had a number of wins over the last eight months. They've grown their order book by more than $70 million. It trades at an attractive PE of 30 times given the growth outlook. The earnings here are growing at double-digit rates. So we think that one is off the radar. A lot of people haven't heard of the particular company. The prospects and the growth outlook for that business is very, very strong.

Chris Conway: Good pick. Steve, what's an underrated ASX innovator, and I guess why is the market missing it?

Nanosonics (ASX: NAN)

Steve Johnson: I'm going to run with Nanosonics here. It's a stock we own in our portfolio and I guess it's been a bit of a candidate for what we've been talking about on the show already. It's taken longer for this business to get to where it is than people had expected and probably that they had promised. The business was actually founded in 2000 and didn't generate its first dollar of revenue until 2010. It has a business that from there has scaled really, really quickly.

They disinfect hospital equipment and is now very profitable, but they are pouring tens of millions of dollars into developing a new product that's going to disinfect endoscope equipment. It's been a bit of the same story, it's taken longer - this is US approvals. They are on the border there of generating some revenue this year, growing very quickly into 2027 and 2028 in terms of the new product. And I think that business has a lot of potential ahead of it and they're probably going to do the same thing again in another category down the track, but I think it's worth paying for.

Stock picks – best ASX innovator across the entire market cap

Chris Conway: All right, I've asked the gents to bring along their straight-up best ASX innovator across any market cap spectrum. Steve, I'll stay with you. What have you got for us?

Cochlear (ASX: COH) and ResMed (ASX: RMD)

Steve Johnson: I'm going to stay in the healthcare sector. I think Cochlear and ResMed, two wonderful Aussie success stories that have stayed at the forefront of their fields for decades and good examples, I think, of big R&D budgets that they've been able to keep reinvesting back into, staying ahead of the competition, and they've done it successfully for a very long time.

Chris Conway: No doubt. Martin, round us out. What's the best ASX innovator in your opinion?

Xero (ASX: XRO)

Martin Hickson: I've gone with one that's not in our index. It's in the ASX 100. It's accounting software provider Xero. Xero listed in New Zealand back in 2007 with a $15 million IPO. Today, it has a $26 billion market cap, so great Australian success story. I remember when it listed here on the ASX back in 2012. At the time, you had MYOB and Reckon as the dominant players. Today, Xero has 60% market share in Australia. They've taken that product globally quite successfully, so it's been a great Australian success story. So I think that's one of the best innovators on the ASX.

Steve Johnson: Kiwis are not going to like that, Martin, calling it an Australian success story.

Martin Hickson: Oh, well.

Chris Conway: Shots fired. If you enjoyed that episode of Buy Hold Sell, make sure to give it a like and don't forget to follow our YouTube channel. We're adding lots of great content every single week.