30 BARRON’S October 26, 2020
Q&A
Technology is an important part of every
sector, and is blurring the lines between
and among sectors.
Student of
Disruptive
Innovation
An Interview With Cathie Wood
Founder, ARK Investments
A
RK Investment Managementhas been in
the spotlight since it was founded in 2014.
The firm is solely focused on disruptive in-
novation—and founder Cathie Wood, a
trained economist, is famously bullish on
Tesla and Bitcoin, two frequently conten-
tious 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 actively managed competitors.
Today, the firm manages $30 billion in assets, including
$15 billion in ETFs.
Barron’sinterviewed 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 pan-
demic has disrupted many aspects of our lives and pos-
sibly ushered in permanent social and economic
changes, Wood chatted withBarron’sagain—about inno-
vation 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 work-
place 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 destruc-
tion. 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.
By EVIE LIU
October 26, 2020 BARRON’S 31
Health care will see the convergence of
DNA sequencing, artificial intelligence,
and CRISPR gene editing.
You describe innovation as a sub-
asset class, similar to emerging
markets in the 1980s. How is inno-
vation as an investment style dif-
ferent from growth investing?
Innovation is early-stage growth, and
it is typically exponential growth.
Companies developing these plat-
forms 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 be-
comes, and the faster it grows.
ARK runs concentratedportfolios,
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.
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 be-
come a really important part of the au-
tonomous 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 will-
ingness to step in when others are sell-
ing 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 un-
derappreciated part of the market is
genomics, and the most misunder-
stood is health care. Health care is the
largest part of our portfolio—it’s about
37% of the flagshipARK 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 intelli-
gence, 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 sup-
ply chain in terms of tests and vac-
cines. 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 ecosys-
tem leading up to the vaccine.Mod-
erna[MRNA] gets all the headlines,
but there’s room for many. In the
ARK Genomic Revolution[ARKG]
portfolio, we own a vaccine company
calledArcturus 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 Mod-
erna’s vaccine. The other one isInovio
Pharmaceuticals[INO], a DNA vac-
cine manufacturer. In the flagship port-
folio we have DNA sequencerIllumina
[ILMN] and synthetic biology com-
panyTwist Bioscience[TWST]. Illu-
mina was able to read the 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 previ-
ous valuations were just too high for
us. Telehealth is a very big idea;Tela-
doc Health[TDOC] just made a ter-
rific acquisition.DocuSign[DOCU] is
another Covid-inspired name. We
knew security would rise as an impor-
tant issue, more so now as people are
working away from their offices, so we
boughtCrowdStrike[CRWD] and
Zscaler[ZS]. Another company per-
fect for the digital workplace isPager-
Duty[PD]. It offers over-the-air soft-
ware 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
againstUber[UBER] andLyft
[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 en-
gine. When the world goes autono-
mous—unlike drivers who were work-
ing for Uber and Lyft who will be left
out of the party—Tesla’s ride-hailing
network of drivers will own an auton-
omous car that will work for them.
They will be entrepreneurs.
If Tesla pulls this off, it will be so
much more profitable than just build-
ing cars. Electric-vehicle margins are
in the 20s [percent range]; ride-hail-
ing is probably in the 40s; and soft-
ware-as-a-service and autonomous
vehicles will be in the 80s. This is a
margin structure that most auto ana-
lysts have never seen.
A lot of people have compared
Nikola, which makes trucks pow-
ered by hydrogen fuel cells, to
Tesla, which uses electric batter-
ies. Do you see the parallel?
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
- 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 in-
frastructures. 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 be-
lieve it will be successful for trucks.
You wrote to Elon Musk in 2018 to
dissuade him from taking the com-
pany 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 los-
ing 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 no-
where [close to that]. In fact, their
stocks have been cut almost in half
since the IPO—even before the coro-
navirus. 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, adop-
tion 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 partic-
ular, 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.
Adrienne Grunwald Thanks, Cathie.B
These new technologies have fallen
enough in cost and price and are
ready for prime time now.
“We believe Tesla is going to launch a ride-hailing
network to compete against Uber and Lyft.”—Cathie Wood
Pouncing on
Opportunities
ARK’s five
actively man-
aged ETFs have
an average
year-to-date
return of
92%
with help from
big bets on Covid-
inspired stocks
like Teladoc.