By Leslie P. Norton, Barron's
Catherine Wood founded ARK Investment Management in 2014 to focus solely on disruptive innovation. The name itself—an acronym for Active Research Knowledge—signaled that Wood would be early to disruptive investments such as Bitcoin and Tesla. Today, the firm manages $8.4 billion in assets, including $2.9 billion in exchange-traded funds.
Before founding ARK, Wood was a hedge-fund manager, chief investment officer of global thematic strategies at AllianceBernstein, and an economist at Jennison Associates, which was founded by superinvestor and mentor Sig Segalas. Another mentor, from Wood’s undergraduate days at the University of Southern California, was economist Arthur Laffer. Last year, Wood was named to the Bloomberg 50 list of key figures in business, entertainment, finance, politics, technology, and science.
Wood chatted with Barron’s about her outlook for growth, Bitcoin, and Tesla. An edited transcript follows.
Barron’s: The yield curve is inverted, which means that investors have bid up long-term bonds to the point that their yields are below those of shorter-term bonds. This usually signals that investors are bracing for a recession. But you expect more growth. Why?
Wood: The period we’re in right now is like the 50 years ended in 1929, when telephone, electricity, and the internal combustion engine were all invented. They caused incredible growth opportunities, incredible productivity, incredible wealth generation. It’s hard to get the data on the yield curve back then, but we finally found a chart that goes back into the 1860s. The yield curve was inverted during that 50-year period more than 50% of the time, particularly during periods of the most rapid growth. When technological innovation is exploding, real growth is very strong.
How does technological innovation show up in the yield curve?
Wood: Short rates are influenced mostly by the rate of economic growth and go up quite a bit. Long rates don’t go up that much. The yield curve tends to invert because technologically enabled innovation is deflationary. This is good deflation, not bad deflation. During that 50-year period, short rates averaged 4.88% and long rates averaged 3.88%. It was an inverted yield curve, but the actual level of interest rates was higher than it is today. If we’re right today, imagine how much growth there is going to be out there. The whole yield curve will move up. It’s just that short rates will move up more than long rates.
How much inversion could we see?
Wood: The inversion today is close to 20 basis points [0.2%]; we could go at least another 80 basis points. Back then, there were three innovation platforms, as I said. Today, there are five: DNA sequencing; robotics with collaborative robots, or cobots; energy storage, and Tesla is pushing the envelope there; artificial intelligence, which has an even bigger impact than the internet; and blockchain technology. All of these are inherently deflationary and will stimulate unit growth. So we’re pretty excited, and we think that inversion could easily, on average, be bigger this time around than it was last time.
What are the market implications?
Wood: Since the tech and telecom bust, and then the 2008-09 [financial crisis], the move toward index investing accelerated because of risk aversion. The irony is that indexes are going to be disadvantaged in that new world because they contain value traps, which are created by these five innovation platforms. There will be a lot of disruption, a lot of disintermediation, and the indexes will underperform any innovation-based strategy that is on the right side of change. We’re talking about exponential growth.
For example, the number of electric-vehicle sales will jump from 1.45 million last year globally to 26 million in 2023. That’s almost a 20-fold increase in five years. Our confidence in that forecast has increased because China is starting to subsidize. Artificial intelligence will power every line item of the income statement, and blockchain technology, as well. That’s flipping the world upside down from the past 20 years. The irony is that the internet bubble bore all these seeds of change, but there was too much capital chasing too few opportunities.
Tech is a major part of the indexes—so won’t we see gains for those companies, too?
Wood: I don’t know. Some innovations will disadvantage technologies that people feel pretty safe with right now. In the old days, you never got fired for owning IBM . Today, yes, you can be fired. That’s going to happen more broadly. Financial services are being disrupted left, right, and center. Mobile payments in China have gone from $1 trillion to $26 trillion in four years. It’s going to make banks pure commodities, so we don’t own any banks. Or energy stocks—we’re going to see autonomous taxis, with utilization that’s much higher than that of our personal cars. You and I use our cars roughly 4% to 5% a day; for autonomous vehicles, that number will be north of 50%. Commodity prices are determined at the margin, and at the margin, we see the destruction of oil demand, which will impact oil stocks, starting in the next few years. Gas-powered autos are in real trouble. Auto companies have to insinuate themselves into some autonomous-taxi network platform. Otherwise, most will fail or be consolidated out of existence.
You’re best known for your bullishness on Bitcoin and Tesla. Let’s start with the first.
Wood: Give me a decent time horizon, like five years, and my confidence on Bitcoin has increased substantially, for a couple of reasons. Its share of the cryptoasset ecosystem network value has gone from the low 30% range to the high 50s. It has proved that it’s the reserve currency of the cryptoasset ecosystem, like the dollar in the world today. We did our first white paper on Bitcoin in 2015. I remember asking Art Laffer how big this could be. The network value, or market cap, of Bitcoin was something like $5 billion. He said, “How big is the U.S. monetary base? There’s your answer.” At that time, it was $4.5 trillion. I’m not going to tell you we’ll get there in the next five years, but we could get halfway there, from a networked value of $175 billion today to $2 trillion.
Your new price target for Tesla [ticker: TSLA] is $6,000, up from $4,000, even though it’s having a terrible year. It’s now about $240.
Wood: We don’t talk about it much because people don’t even believe $4,000. Our most important assumption is [demand for] electric vehicles, given the battery-cost declines and the new chemistries coming out of Tesla. We believe the average electric-vehicle price will drop below the average auto price in the next two years. In five years, a Toyota Camry will still be around $25,000, but a 200-mile-range electric vehicle will probably be $15,000. They will be cheaper, and they’re better vehicles, with a fraction of the parts of the typical internal combustion engine. It will be a no-brainer to shift. Our bear case for Tesla in five years is $600, if it loses two-thirds of its global market share, which is 17% right now of the electric-vehicle, or EV, market. Our bull case on electric vehicles get us to $1,400 per share [without counting the boom in autonomous vehicles].”
Once you go into autonomous, the numbers move up dramatically because unlike the EV space, where gross margins are 25% to 30%, you’re talking about a software-as-a-service model: The cars will be networked and powered by artificial intelligence, and margins will be closer to 80%. So the blended margin that Tesla will enjoy in the bull case will be north of 50% to 60%. Nobody else has margins anywhere near that, because they don’t believe in autonomous.
What else do you like?
Wood: We have three gene-editing companies in the top 10 of the flagship fund: Intellia Therapeutics [NTLA], Crispr Therapeutics [CRSP], and Editas Medicine [EDIT]. If I had told you during the tech and telecom bubble that there would be new technologies and therapies evolving thanks to DNA sequencing, CRISPR gene editing, and CAR T-cell technology that would cure cancer, blindness, lots of diseases—and that there were three companies with foundational patents—the market might have taken these stocks into the $300 billion market-cap territory, but the three can’t even get to $5 billion combined [because] we’re on the flip side of the tech and telecom bubble. There is so much skepticism.
Every health-care analyst is going to have to be extremely comfortable with technology. The foundational stock in the genomic portfolio is Illumina [ILMN], whose machines are responsible for 95% of all the base pairs of DNA sequenced in the world today. Our minimum hurdle is 15% compound annual return a year, averaged over a five-year period.
What’s the thesis for Square [SQ]?
Wood: It’s going to disintermediate the banking system with its Cash app and its superior data on customers and users. You can buy and sell Bitcoin without paying a fee in the Cash app. It will enable microfinance everywhere around the world. Square’s Cash app users are growing more than 100% year over year, while Venmo’s are growing more than 50%. As of now JPMorgan is the only bank with more users than Venmo on the digital side.
What’s the biggest risk to your investing style?
Wood: From a short-term perspective, if value came back into favor and there were reversion to the mean. However, over a five-year period, these innovation platforms will win out.
Read the original Barron's article¹ by Leslie P. Norton : Tesla, Bitcoin and the Inverted Yield Curve Herald a New Era of Growth
The above article is for informational purposes only, which reflects the views and opinions of Catherine Wood, founder of ARK Investment Management (“ARK”). Additional information regarding ARK can be viewed on SEC’s investment adviser public disclosure site by clicking the following link: Investment Adviser Public Disclosure This article was written without the participation, views and opinions of PagnatoKarp. The posting of this article does not serve as a direct or tacit endorsement by PagnatoKarp. The information contained herein should not be construed as an offer or a solicitation of an offer to buy or sell any particular financial instrument. Past performance is no guarantee of future results. Investing in financial instruments involves the risk of loss which investors should be prepared to bear. Information contained in this article was not sourced by PagnatoKarp, the accuracy of which we are not responsible for verifying and is, therefore, not guaranteed.
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