2/17/2021 Why a Student of Disruptive Innovation Is Betting on Tesla, Telehealth, and Genomics | Barron's

TECHNOLOGY Q&A

Why a Student of Disruptive Innovation Is

Betting on Tesla, Telehealth, and
Genomics
By Evie Liu Updated October 26, 2020 / Original October 23, 2020

Technology is blurring the lines between and among sectors, says ARK Investment’s Cathie Wood.
Adrienne Grunwald

ARK Investment Management has been in the spotlight since it was founded in
2014. The firm is solely focused on disruptive innovation—and founder Cathie
Wood, a trained economist, is famously bullish on Tesla and Bitcoin, two frequently
contentious investments. ARK’s optimism about both has given the firm a stellar
track record.

How stellar? The company’s five actively managed exchange-traded funds have
returned 92% year to date on average, and the four that have five-year records have
returned an annualized 37% in that time, beating the broad market and most
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actively managed competitors. Today, the firm manages $30 billion in assets,
including $15 billion in ETFs.

Barron’s interviewed Wood in early August of last year, when unemployment was
at historic lows and the stock market was on a tear. Now, as the Covid-19 pandemic
has disrupted many aspects of our lives and possibly ushered in permanent social
and economic changes, Wood chatted with Barron’s again—about innovation and
destruction in a post-Covid world, a new golden age for health care, her favorite
stocks for the digital workspace, Tesla (ticker: TSLA), Nikola (NKLA), and more. Our
conversation has been edited and condensed for clarity.

Barron’s: You’re a student of disruption. What does Covid mean for the global
economy?

Cathie Wood: Covid-19 is accelerating all the disruptive innovations. Many

companies that serve the digital workplace say they didn’t expect this many
customers for at least three to five years. There’s been a rush into the new world.
The other side of disruptive innovation is creative destruction. Many companies are
being disintermediated by these new platforms—not surprisingly, in financials,
energy, and industrials tied to the internal combustion engine. There are a lot of
companies in harm’s way.

You describe innovation as a sub-asset class, similar to emerging markets in the

1980s. How is innovation as an investment style different from growth investing?

Innovation is early-stage growth, and it is typically exponential growth. Companies

developing these platforms can generate revenue growth of more than 20%
[annually] for years and years. Most growth companies have a decay rate, which
means the bigger a company gets, the harder it is to grow. Exponential growth
often includes network effects and virality, which means the more people joining
the network, the more valuable it becomes, and the faster it grows.

ARK runs concentrated portfolios, typically with fewer than 50 stocks. How do
you choose?

Our ideas start with our research, not any index. For example, we take a blank sheet
of paper and just say, “What is an autonomous vehicle? What’s the right way to
build one? What are the critical variables?” We inevitably run into the companies
that not only have good answers, but are leading the charge.
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It’s not like we don’t make mistakes. In the early days, we thought Lidar [a
technology that measures distance for autonomous vehicles] was going to become
a really important part of the autonomous taxi network. That wasn’t correct. But we
probably are pushing the envelope further and faster than most people, and we
have a much longer time horizon, at least seven years. That’s the biggest secret to
our strategy—the willingness to step in when others are selling a stock for very
short-term reasons. We get great opportunities like that.

What areas of the market are you most intrigued by these days?

The most inefficiently priced and underappreciated part of the market is genomics,
and the most misunderstood is health care. Health care is the largest part of our
portfolio—it’s about 37% of the flagship ARK Innovation [ARKK]. Technology is an
important part of every sector, and is blurring the lines between and among
sectors. Health care [will see] the convergence of DNA sequencing, artificial
intelligence, and CRISPR gene editing—all new technologies that have fallen
enough in cost and price and are ready for prime time now.

We learned from the coronavirus that there were weak links in the supply chain in
terms of tests and vaccines. But what we have this year—very unusual—is cover for
the health-care space. No one in Congress wants to vote against budgets to help
get us all back to work.

We think we’re headed into another golden age for health care. Genentech
launched the biotech revolution in the ’80s, and we had 20 years of rising returns
on investments in health care. They became super stocks. That’s about to happen
again.

Does ARK own any companies working on a Covid-19 vaccine?

We own various parts of the ecosystem leading up to the vaccine. Moderna

[MRNA] gets all the headlines, but there’s room for many. In the ARK Genomic
Revolution [ARKG] portfolio, we own a vaccine company called Arcturus
Therapeutics [ARCT] that uses the self-replicating MRNA. That means when you
get the vaccine, you don’t have to go for a booster shot like you do with Moderna’s
vaccine. The other one is Inovio Pharmaceuticals [INO], a DNA vaccine
manufacturer. In the flagship portfolio we have DNA sequencer Illumina [ILMN] and
synthetic biology company Twist Bioscience [TWST]. Illumina was able to read the

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genomic profile of the Covid-19, and Twist was able to write the instructions and
send them to the testing companies so they could develop tests.

What companies have you added to the portfolio this year?

When stocks were really beaten up, we bought some companies whose previous
valuations were just too high for us. Telehealth is a very big idea; Teladoc Health
[TDOC] just made a terrific acquisition. DocuSign [DOCU] is another Covid-inspired
name. We knew security would rise as an important issue, more so now as people
are working away from their offices, so we bought CrowdStrike [CRWD] and
Zscaler [ZS]. Another company perfect for the digital workplace is PagerDuty [PD].
It offers over-the-air software updates before companies even know they have a
problem with their networks. PagerDuty partners with Zoom, Amazon Web
Services, and Salesforce.com. These enterprises are going to encourage others to
buy the service as well. [CrowdStrike, Zscaler, DocuSign, and PagerDuty have all
gone public in the past two years.]

You’re famous for being a Tesla bull. What do you like now?

We believe Tesla is going to launch a ride-hailing network to compete against Uber

[UBER] and Lyft [LYFT]. If it does that successfully, it will be able to provide drivers
with cars. The total cost of ownership and operating will be about one-third less
than a Toyota Camry. It’s going to be a win-win situation—drivers can pay $5,000
down and work the rest of the car off by driving it, while Tesla gets the data that the
driver delivers every day for its artificial intelligence engine. When the world goes
autonomous—unlike drivers who were working for Uber and Lyft who will be left
out of the party—Tesla’s ride-hailing network of drivers will own an autonomous
car that will work for them. They will be entrepreneurs.

If Tesla pulls this off, it will be so much more profitable than just building cars.
Electric-vehicle margins are in the 20s [percent range]; ride-hailing is probably in
the 40s; and software-as-a-service and autonomous vehicles will be in the 80s. This
is a margin structure that most auto analysts have never seen.

A lot of people have compared Nikola, which makes trucks powered by

hydrogen fuel cells, to Tesla, which uses electric batteries. Do you see the
parallel?

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No. More importantly, Nikola was comparing itself to Tesla, so we did take a close
look. We started doing research on hydrogen fuel cells in 2015. We learned that it is
33% more expensive for a trucker to operate a hydrogen fuel-cell truck over a
seven-year period. And the infrastructure for a hydrogen-fuel ecosystem costs five
to 10 times more than electric infrastructures. The most important difference is: I
charge my Tesla at home; you’ll not be able to do that with a hydrogen fuel-cell car.
So frankly, it’s an uneconomic idea. Toyota has not had success with its hydrogen
fuel-cell car. I don’t know why we should believe it will be successful for trucks.

You wrote to Elon Musk in 2018 to dissuade him from taking the company
private. Is there a risk that great innovative companies could remain privately
held for longer?

Companies that are staying private for so long are spending too much time getting
ready for their liquidity event, prettying things up—and they’re losing strategic
focus. Good cases in point are Uber and Lyft. By all rights, they should have the
autonomous-taxi network opportunity; they should be in the pole position. But
they’re nowhere [close to that]. In fact, their stocks have been cut almost in half
since the IPO—even before the coronavirus. If they had started outfitting the cars of
their drivers, they could have much more data today than Tesla. The name of the
game in the autonomous world is, who is going to have the most real-world driving
data and the highest quality data, along with the best AI expertise. They don’t,
because they weren’t thinking about this, but they should have been.

What else do you like?

If we’re going to bring supply chains closer to home, 3D printing. Even though it’s
had a very slow start and is exclusive to the aerospace area, adoption will
accelerate because it’s so much cheaper and faster, and you can manufacture very
close to the end consumer. Another area is industrial robots. Collaborative robots,
in particular, are covered with sensors, so they can work alongside human beings.
That’s especially relevant now that human beings are going to have to socially
distance a bit more.

Thanks, Cathie.

Pouncing on Opportunities

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ARK’s five
actively managed ETFs have an average
year-to-date return of

92%
with help from
big bets on Covid-inspired stocks
like Teladoc.

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