ARK Invest is known for targeting high-growth technology companies, with one of its most recent additions being DraftKings. In an interview with Maverick’s Lee Ainslie at the Robinhood Investors Conference this week, Cathie Wood of ARK Invest discussed the firm’s process and updated its views on some positions, including Tesla.
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Cathie Wood's investment process
Wood said their investment process starts from the top down and that they are "focused on learning curves in technology" and "disruptive innovation."
ARK Invest centers its research on rights law, which says that for every cumulative doubling in the number of units produced, cost declines at a consistent rate. Wood explained that the law holds true for every technology, including semiconductors.
She added that they see 14 different technologies emerging right now, enabling five major transformational platforms. Wood said they're in the early stages, but the cumulative doublings happen rapidly.
"For every cumulative doubling, that's pretty, pretty phenomenal in battery pack systems and electric vehicles at 28%," she said. "So very deflationary, but good deflation, triggering and unleashing waves of demand, as costs go down and prices fall."
Where ARK Invest focuses its attention
The five platforms ARK Invest is focused on are DNA sequencing, robots, energy storage, artificial intelligence and blockchain technology. Wood said their analysts' responsibilities are broken into the 14 technologies supporting those platforms.
"So they are specialists when it comes to technology, the technologies, and they are generalists when they come to sectors, so it's a little bit… Well, it actually is the opposite of how most research firms are set up today," she explained. "They're set up by sector, or industry, sub-industry. And not by technology, but we believe technology is seeping into and transforming every sector. And we actually disagree with most of the categorizations of companies today, because these platforms are converging."
Wood also said they use a five-year time horizon instead of quarter by quarter for their investments. She explained that there's "a lot of noise in the quarters," and they want their companies to sacrifice short-term profitability to capitalize on the trends they see that will deliver exponential growth.
What the firm looks for
ARK Invest has harnessed social media to engage with individuals about technology, and the firm gives its research away for free. Wood explained what they look for when choosing companies to invest in.
"First of all, the right technologies, that's critical," she said. "Second, a visionary management who's willing to stand up again, short-term-oriented shareholders who, especially after the tech and telecom bust, and 08/09 meltdown, you know, became much more short-term oriented, much more risk averse. And to them, that means, you know, profits now and dividends. Now, we are not looking for that. We're looking for leaders who are championing these technologies, driving them as forcefully forward as possible. And standing up for the company saying, you know, we want to, we want to sacrifice profitability in the short term, because this is going to give us the best opportunity to scale exponentially and capture this market."
Wood also evaluates the risk a company faces, like government regulation, taxes or other obstacles. Another risk can be another technology coming through to disrupt the technologies they believe are disruptive. ARK Invest traces its ideas back to the dotcom bubble.
"All the seeds for what we're doing now were planted in the 20 years that ended in the tech and telecom bubble," Wood said. "They took 20 to 25 years to gestate so that the technologies were ready. And the costs were low enough. Now that the costs are low enough, we're really going to see exponential growth. We did not see it back then."
She expects the electric vehicle market to grow from 2.2 million units last year to 40 million in 2025. Wood also said China is a big part of the transition because it will be the largest market, and the nation is subsidizing EVs.
Diving into Tesla
Wood also talked about Tesla, which she said is a great example of how the platforms they focus on are converging with technology. She has a $3,000 price target on the automaker.
"Tesla is in the pole position to develop autonomous taxi networks around the United States and maybe elsewhere," she said. "Then we're seeing the convergence of three technologies: robotics, because autonomous vehicles are robots, energy storage, they will be electric, cheaper than gas-powered and better, better vehicles as well, and they will be powered by artificial intelligence."
Wood said one thing that has surprised them over the last four years is that Tesla has kept a lot more market share than they expected it to.
She also noted that the automaker had built its battery technology on consumer electronics batteries, while most other automakers use a completely different form factor for a much higher cost. Wood added that Tesla took a page from Apple's book, as the iPhone maker was the only cell phone manufacturer to design its own chip.
Autonomous driving
Wood believes Tesla's artificial intelligence and data collection technology "have put it in the pole position for autonomous" driving. She assigns a 50% probability that the automaker will be a winner in the U.S. in autonomous driving. Their bear case price target is $1,500, and it assumes no autonomous driving but a fairly constant market share of about 20%.
Ainslie asked Wood what she thinks is the biggest risk to her thesis for Tesla, and she said she doesn't think it's autonomous driving. She thinks it's the lack of focus on design and increasing competition.
"We've seen it from the Ford truck recently and the Mustang, the new Ford electric truck, which has been getting orders, seems to be doing very well," she said. "And I think the Cybertruck may have some more, more difficult competition than Elon was expecting."
Wood pointed out that the electric Mustang became Norway's bestselling car in the last month.
"So even though the Mustang is not a better electric vehicle, it does have the design," she said. "I know, there are a lot of complaints about Tesla not focusing as much on design as it is on the technology. So that could be one of the risks here as well. I do think anyone comparing cars and wanting the best electric vehicle when we're talking about range, and performance, both meanings are one of the metrics being zero to 60. In you know, fewer than two seconds."
Wood believes people want design more than performance, noting that the Mustang has always been a popular car. The first car she ever bought was a Mustang, and she's been thinking about trying out the electric Mustang to see if the design makes a difference, but she doubts it will.
Bitcoin is the reserve currency of the crypto ecosystem
Shifting to bitcoin and cryptocurrency, Wood said she believes bitcoin is the reserve currency of the crypto-asset ecosystem and that it will be difficult to shut it down.
"Unlike Libra or now Diem, there was one throat to choke there," she said. "That was Facebook, and everybody seems to find a few policymakers seem to be wanting to choke its throat. And so there was a swift response to Libra. But a big point, you know, you try and shut down miners [in] one place, they'll migrate elsewhere."
She was referring to China's crackdown on crypto miners, who have had to pull up their roots and are now moving to other countries. Wood believes that the competition among countries will be good for crypto, noting that China is blocking the opportunity. She believes crypto will become one of China's Achilles' heels because the country likes closed ecosystems rather than open-source technology.
The importance of either
Wood also believes Ethereum will play an important role moving forward because it's enabling decentralized finance.
"We think Bitcoin is the reserve currency because it has the most secure network, the theory is not as secure," she explained. "And Ethereum has a big task, the task ahead, moving from proof of work to proof of stake, it seems to be making progress. So we're very optimistic on both of those."
This post first appeared on ValueWalk Premium
