ARK Invest’s Cathie Wood assesses innovation and the future

ETF guru Cathie Wood of ARK Invest has never been bashful when it comes to defying conventional wisdom or making bold proclamations.

She did so with Tesla, dunking on her doubters in short order, and has been roughly as bullish in Bitcoin as well as investments in disruptive technology as a whole.

“We’ve had a history of going against the grain, the traditional analysts’ view of the world, (such as) Tesla starting, actually, way back in 2012 (and) Bitcoin in 2015,” Wood said during Ark's monthly update on Tuesday. “We think those two are giving us a glimpse of the scaling opportunities we have ahead.

“And we think our portfolio is full of scaling opportunities associated with the five major platforms – DNA sequencing, robotics, energy storage, artificial intelligence and blockchain technologies – and the 14 underlying technologies. Our conviction has increased in the last year, it has not decreased.”

The roaring 2020s

Wood, 66, was named 2020’s best stock-selector by Bloomberg News during a banner year for her ETFs.  In 2021, ARK’s ETFs were decidedly less successful than in 2020 or any other past year.

That has hardly silenced Wood in the new year, as not even two weeks into 2022 she has made a significant splash by calling the market response to legacy automakers’ push into the EV market “ridiculous” last week. This week, she offered her monthly update and explained her argument

“Electric makes up about 2%, maybe 3% of these companies' revenues. They’ve got 97% that we think is on its way out,” Wood said. “We don’t know how long it will take, but there’s going to be a lot of obsolescence there. I also think there is going to be pretty much a bloodbath in the used-car market.” 

Broader view

Wood has successfully placed emphases on innovation and disruption in ARK’s investing strategy, and she has been largely unmoved by superficial trends. Depth of analysis and long-term projection have also guided ARK's strategy, including within the automobile and automotive tech industries. 

“Autos are one example of what will be many disturbances out there in the traditional world order because of how innovation’s going to transform the global economy,” Wood said. “When I saw auto stocks really moving into overdrive after a really good year last year, the auto stocks did better than Tesla, I thought ‘okay, this is really long in the tooth.’ Any company that is from the industrial world and not embracing new technologies is probably going to be disrupted or disintermediated.”

The auto industry in general and staid analysts’ responses to Tesla in particular were examples, Wood said, of how traditional approaches are unsuitable to evaluate forward-thinking companies.

“Auto analysts were not well-equipped to follow Tesla. It’s not an auto company, it’s a robotics, energy storage, artificial intelligence, software-as-a-service company,” Wood said.

Critiquing the critics

Wood mentioned that ARK does, in fact, read the papers. Part of what ARK has undertaken in recent years – beyond research it makes available for free and refining its selection process – is a comprehensive look at negative views of their company.

“(Criticism) tends to be around valuation, this idea that Ark does not understand valuation. We most certainly do understand valuation and in fact we assume massive multiple compressions during the next five years in our strategies. Overcoming that compression are massive growth opportunities,” Wood said.

“So, to those who say we don’t understand valuation, we would really suggest highly that they start reading about technology. We give our research away for free. Because we believe that they do not understand technology and how powerful the trends that are emerging are.”

Wood also said that while there were some projection models with narrow considerations of variables that prospered in the short run, she expected the principles that guided ARK to prevail over time.

“It’s either backwards-looking valuation or run-rate valuation, they’re not looking five years out,” Wood said. “What is investing? It’s looking to the future, not to the past, but we see a lot of quant-driven strategies, algorithms, a lot of muscle memory dictating what’s going on out there.”

Adapting on Bitcoin

ARK has been developing analytical tools as new means of evaluating Bitcoin.

Bitcoin’s recent selloff, price drop and the broader scrutiny of cryptocurrencies as a whole do not seem to have deterred ARK in the least bit.

“In terms of the long-term fundamentals, and particularly security, our conviction has never been higher,” said ARK analyst Yassine Elmandjra, also speaking at the presentation.

Wood spoke about the oil industry’s price “gyrations” and described it as an industry perhaps making its “last gasps,” with demand having peaked, in her view, two or three years ago.

“The writing’s on the wall, the capital spending has dried up; we’ve been surprised that more capital spending hasn’t started in response to the (rising) price,” Wood said. “I think it’s because many countries are saying, ‘okay, we are going X oil by this date or X fossil fuels by this date.’”

Consumer preference coupled with climate pledges from national governments and private companies amid the proliferation of alternative energy sources prompted Wood to compare the petroleum sector to the gone-by whale oil industry.

“Demand is not going to be an engine for oil. It is the curtailment of supply that is lifting the prices short-term. This is not a healthy industry,” Wood said. “I can’t tell when it’s going to happen, I don’t know, all I know is that it’ll be pretty swift when we hit the inflection point.”

Innovation, disruption, recession

With growing anxiety over a potential forthcoming recession, Wood was asked how she felt the types of companies that ARK tends to hold would fare if those fears became a reality.

While algorithms and other dominant evaluation tools have not favoured those stocks in 2021, a recession, Wood said, would shift their analyses toward bases in revenue growth rates, earnings growth rates, price momentum and other indicators that would value innovative tech stocks. 

“One thing, for sure, their relative growth rates will skyrocket compared to most traditional companies out there,” Wood said. “Their valuations have been cut, many of them by half, already. That valuation reset has not been corroborated by the private markets.”