ARK's Big Ideas 2021 Breakdown
Innovation, like evolution, is a process of constantly discovering ways of rearranging the world into forms that are unlikely to arise by chance – and that happen to be useful. - Matt Ridley
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“The true currency of life is time…and we have all got a limited stock!” - Robert Harris
To all the Time Investors,
The modern world has experienced vast prosperities and knowledge accumulation relative to our ancestors in the recent century. This achievement can be summarized by one word: innovation! Matt Ridley, journalist, and author of How Innovation Works, claims that innovation is the most important fact about the modern world, but the least well understood. Today we will summarize ARK’s Big Ideas report for 2021 that gives us a framework on how to understand the impact of innovation in the coming decade.
📖Why is ARK investing in disruptive technologies?
Historically, innovations leading to technologies such as the steam engine, electricity, internal combustion engine, computers, and the internet were transformative to humans globally. They lead to new industries and further innovation that ultimately resulted in great economic expansion.
As investors, we must embrace the power of innovation and attempt to understand what technologies are next in line to transform society. To tackle this idea, we will focus on research conducted by Cathie Wood and the ARK team whose thesis is based on the effects of innovation. In their white paper, ARK believes that these next 10 years will be viewed by history as an era that experienced significant disruptive innovations. The five key technology platforms in their research are artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology. Before we understand the impact of these technologies it is important to get some quick summaries of what they are designed to deliver:
Artificial Intelligence: Learning systems that use data, automate knowledge work, and accelerate the infiltration of technologies to solve complex problems in society. AI will transform all sectors in the economy, especially the ones that have been resistant to complete digital change such as healthcare and financial services.
DNA Sequencing: The cost to map the whole human genome has fallen drastically. This will spark new innovations in healthcare such as precision medicine, diagnostic testing, preventative cures of rare diseases, and treatments for the longevity of life.
Robotics: With advanced software, sensors, and new inventions in critical hardware robots will assist humans across all aspects of life. Productivity and lower unit costs will replace repetitive laborious tasks with more meaningful work for humans.
Energy Storage: The supply of electricity will be transformed with the declining costs of lithium-ion batteries and new innovations such as solid-state batteries. Energy will need to be dispersed more efficiently in a profitable manner to meet society’s demands across electric vehicles, micro-mobility, and clean energy. Across many sectors and more particularly the mobility sectors, infrastructure to support the “electrification” movement will be essential.
Blockchain Technology: Open-source protocols that verify proof of ownership and ensure digital scarcity will penetrate financial services and remove friction imposed by legacy systems. When it comes to access to capital the world will become more liquid.
All these technologies will deliver cost declines, impact diverse industries globally, and foster additional innovations. Ultimately, the platforms will create similar transformation effects in a society like the steam engine that sparked the industrial revolution, electricity, or the internet. In the next ten to fifteen years, the five technology platforms will expand from less than $6 trillion to $50 trillion in value and wealth creation globally. This massive expansion is unprecedented.
What are ARK’s Big Ideas for 2021?
To understand these platforms in a little more depth, ARK has released their Big Ideas for this year which highlights the latest developments in innovation and foundation for investors to understand where to seek out wealth-generating opportunities.
1.Deep Learning: This is a form of AI in which companies can use data to write software.
Conversation Computers, Self-Driving Cars, Consumer Apps (TikTok)
Hardware and software costs are declining but the cost of AI training models will increase 100x to $100 million by 2025 (GPT-3, AlphaFold 2)
OpenAI’s GPT-3 is the first artificial intelligence to understand language
Market Value: $30 trillion from $2 trillion resulting in 17% CAGR
More economic value than the internet
2.Re-invention of the data center: Cheaper and more powerful processors will be dominant
ARM/RISC-V processors will displace Intel’s x86 architecture resulting in 71% market share by 2030.
82% of developer PCs (Microsoft and Apple) will be powered by ARM
Accelerators, dominated by GPUs will be the dominant processors in data centers
Market Value: $19 billion in CPU revenue, $100 billion in Server revenue, $41 billion in Accelerator (GPUs) revenue
3.Virtual Worlds: Think of video games, augmented reality, and virtual reality
Revenue from in-game virtual good purchases has increased from 20% to 75%
AR tools from Snapchat, Facebook, and Apple could scale to $130 billion annually
VR needs to achieve complete human immersion at a cost like PCs to gain adoption by 2030
Global gaming will compound 16% in the next five years and become $365 billion by 2025.
AR and VR will hit $28 billion by 2025.
4.Digital Wallets: Traditional banking systems will be challenged by applications such as Venmo, PayPal, and Cash App. Digital wallets will become a central element towards commerce-related activities
In China, mobile payments are 2.5x GDP
In seven years, Cash App and PayPal have 60 million active users reaching the same amount of J.P. Morgan’s deposit account holders
Traditional banks spend $1,000 to acquire a customer while digital wallets spend $20 due to peer-to-peer environments
Market Value: With 230 million estimated users, ARK predicts a value of $4.6 trillion by 2025
5.Bitcoin’s Fundamentals + Institutional Involvement: Bitcoin is emerging as a store of value monetary system in the digital world
As of November 2020, 60% of Bitcoins supply is held by owners instead of traded. The market is long-term focused
Financial institutions and companies such as Tesla have now placed Bitcoin in their personal treasuries and consider it a long-term wealth strategy. This has now opened the gates for more financial innovation through cryptocurrencies like Ethereum.
Institution allocation between 2.5% and 6.5% could impact bitcoin’s price to reach between $200k to $500k
Market Value: Currently, the bitcoin market is valued at $1 trillion with the ability to exceed the golds market cap of ~$10 trillion
6.Electric Vehicles: Electric vehicles are becoming increasingly affordable and with battery technology achieving performance and scalability.
Electric vehicles have been growing at 33% in sales in 2020 from 2019
Battery costs have fallen by 28%
The total cost of ownership is comparable to traditional (internal combustion engine) vehicles
Market Value: Ark estimates that vehicle sales can achieve 82% CAGR resulting in 40 million in unit sales by 2025. If one assumes a traditional price of around $25k the EV industry will be valued at ~$1 trillion.
7.Automation: The integration of robots across industries will play an impactful role towards productivity and also more value-based job creation
Ark estimates that robots will accelerate from 20 robots per 10k employees to 180 robots per 10k employees
Higher wages, lower prices, higher margins, and higher investments will be the result of this expansion
Unpaid labor will also decrease and when labor share declines operating margins will double more than 20%
Market Value: 5% or $1.2 trillion can be added to U.S. GDP during the next five years
8.Autonomous Ride-Hailing: This opens massive opportunities for efficient transportation across all sectors on the road and air. Consumers will no longer need to own vehicles and can save time to be more productive in other activities
Since 1934 the cost per mile has remained stable at $0.70. By 2025 with autonomous driving, it can drop to $0.25.
Autonomous driving could result in 50% margin
Adoption could approach 20% by 2025 if Tesla launches its autonomous service by 2022
Market Value: Ark believes that the market could be $1 trillion in operating earnings annually by 2030. Auto manufacturers could generate $250 billion in earnings by 2030 and individual fleet owners could generate $70 billion in earnings.
9.Delivery Drones: The previous technologies will also accelerate drone commercial use. The cost to transport people and products will be changed drastically.
The cost for a 10-mile drone delivery will decline from $7.80 (remote pilot) to $0.25 (autonomous)
Lower costs for drug delivery, public transportation, product delivery, and commercial use such as inspections will be seen once this technology has scaled
Market Value: Drone Delivery will generate $50 billion in sales, $14 billion in hardware sales, and $3 billion in mapping revenues by 2025
10.Orbital Aerospace: The space industry is evolving from a sector dominated by government-sponsored investment to a thriving global economic industry fueled by advancements in reusable rockets and satellite technologies.
Original rocket launch costs in 2016 were about $14k/kg and now with reusable rockets are around $2k/kg (~85% drop in costs)
Lower launch costs are allowing for more satellites in low earth orbit improving internet connectivity. An estimated 25k active satellites are planned.
Hypersonic travel is also critical to transforming the global economy. Long international flights from economic hubs can be reduced to two-three hours.
Ark estimates $40 billion to provide broadband connectivity to the internet. Including commercial connectivity and government space services, the total market is $100 billion annual TAM.
Regarding hypersonic travel, Ark estimates that from a commercial perspective, companies are willing to pay $100k for long-haul hypersonic flights to save time. This results in a $270 billion annual TAM.
11.3D Printing: New technological additive manufacturing that builds objects layer-by-layer. It has optimized the design and final production of objects at an accelerated pace.
The early stages of the industry were concentrated on prototype design. The next phase is in the mass production of end-use parts
Critical industries that will benefit from end-use parts will be aerospace, semiconductor, and healthcare.
3D printing and AI will also converge resulting in unique designs that will not be possible with traditional manufacturing capabilities
Market Value: TAM is estimated to expand at a 60% CAGR from $12 billion to $120 billion annually.
12.Long Read Sequencing: This technology is focused on mapping the humane genome to understand the make-up and functionality of genes.
The cost to sequence a whole human genome with long-read technology will eventually drop to $200 from $100k in 2010.
Cancers, rare diseases, and hereditary diseases will be understood and mapped utilizing the power of deep learning algorithms.
Market Value: The total market for the long-read sequencing market will amount to $5 billion by 2025.
13.Multi-Cancer Screening: Cancer detection at an early stage will save many lives. To accomplish early detection, liquid biopsies such as blood tests will offer efficient and non-invasive multi-screen cancer tests.
Costs can decrease substantially from $30k to $250 using machine learning algorithms to analyze liquid biopsies.
$1.5k will unlock multi-screen tests for the elderly population at risk of cancer and then expand to the rest saving 1.4 million lives annually
Market Value: By 2025 multi-screening should scale to a $150 billion market
14.Cell and Gene Therapy: Gene therapy treatments for solid tumors and genetic disorders are early in the commercial stage.
Currently, FDA has approved 10 gene therapies and by 2030 it is expected to have 170 gene therapies to treat solid tumors which represent 88% of diagnosed cancers.
Market Value: The market for oncology gene therapy is estimated to be $260 billion.
🤯Key Insights for Time Investors:
The ARK team has laid out 14 technologies within their five technology platforms that are estimated to deliver substantial growth. Based on these platforms, Artificial Intelligence, specifically deep learning, will penetrate and support the rest of the specific technologies. Companies that are heavily involved in the production of artificial intelligent models and the ability to commercialize them will greatly benefit.
Many seasoned investors caution that this period resembles similar characteristics to the Dot-com bubble. However, in their more recent podcast, Cathie Wood has emphasized that during that period a lot of capital was chasing very few opportunities that involved technologies in their infant stage.
Based on wright’s law for every cumulative doubling of units produced, costs will decline by a constant percentage, the ARK team believes that costs and technology are at the right point creating exponential growth opportunities for the right players. GDP in the U.S. in 2035 will be $40 trillion from $20.9 trillion today due to the convergence of the various technology platforms that ARK believes will impact every facet of the economy.
As time investors, this research is a great starting point to understand how the technologies will impact our economy and ultimately identify companies that are embracing them at a fundamental level. Across all of ARK’s ETFs the companies that they have heavily concentrated on support their convictions regarding deep learning, autonomous ride-hailing, electric vehicles, digital wallets, re-invention of data centers, and genomic sequencing.
Below you will find the ARK’s team top 20 holdings across all their active and passive ETFs:
I will leave a quote that perfectly summarizes how we view innovation from Matt Ridley in his book How Innovation Works. “Innovation often disappoints in its early years, only to exceed expectations once it gets going, a phenomenon I call the Amara hype cycle, after Roy Amara, who first said that we underestimate the impact of innovation in the long run but overestimate it in the short run.”
Stay incurably curious!
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Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)
Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies