In the dot-com bubble of the late 1990’s Mary Meeker, a stock market analyst at Morgan Stanley, was the leading voice on the potential of the Internet and the companies that would define the future.
Today, Cathie Wood, CEO of ARK Investment Management, is closely followed for her views on the potential of disruptive innovation and the companies that will transform the world.
The similarities end at them being leading influencers of the capital markets of their times. It is more useful to note what their differences tell us about how the paradigms have shifted in how technologies are changing the world today.
In 1995, Morgan Stanley underwrote the initial public offering (IPO) of Netscape, a company that developed the first mainstream browser for the Internet.
The Netscape IPO represented ground zero of the Internet era. Mary Meeker was the analyst who brought Netscape public. In so doing, she became the authority to explain to investors and business leaders about this new phenomenon called the Internet.
Shortly after the Netscape IPO, Meeker published a 256 page research report called “The Internet Report.” It was more than a stock picking document for investors. According to Fortune magazine, it became the Bible for investors interested in the Web. Demand for it was so high that it was published commercially.
Meeker became the top ranked Internet analyst on Wall Street and had attained celebrity status. According to Fortune magazine:
Without question, she was way ahead of most analysts in seeing how big the Internet could be—and how profoundly it would touch every aspect of American life and commerce. Major institutional investors devoured her “big picture” reports, which she rolled out regularly on such subjects as Internet advertising, retailing, and infrastructure. As the Internet exploded, Meeker became bolder about relying on nonfinancial metrics such as “eyeballs” and “page views.”
Wood’s valuations are driven by technologies approaching disruptive cost declines
In contrast to Mary Meeker’s celebrity status, Cathie Wood has received little notice since she founded ARK Investment Management in 2014. Her profile became inescapable when her actively managed funds became the best performers among 584 funds with at least $1 billion of assets in the global equity market.
The 2020 return for her flagship ARK Innovation Fund was up 169.9%. Returns in 2020 on some of her other funds were as follows:
- ARK Genomic Revolution: 208.4%
- ARK Next Generation Internet: 156.9%
- ARK Autonomous Technology & Robotics: 119.4%
- ARK Fintech Innovation: 102.9%
In February 2018, she made a contrarian call for Tesla stock to reach $4000 within 5 years. That price target was hit (split adjusted) in January 2021.
The spotlight was always on Mary Meeker as the sole analyst. Cathie Wood lets her team of analysts address each technology area.
Brett Winton, ARK’s Head of Research, has worked with Cathie since 2007. He was interviewed on an Odd Lots podcast (also on Spotify and Apple Podcasts) on how they identify winners. Some of his points were as follows.
First, they don’t do stock picking. They look at technologies first, seeking to identify those that are disruptive of the type where history, when looking back, will call these signpost technologies.
The characteristics of such technologies have already been defined by General Purpose Technology Theory. These are technologies that cut across market sectors, are platforms for innovation, and are general purpose.
They are also characterized by their ability to achieve steep cost declines. These cost declines look linear over short time horizons, so they don’t appear in analysts’ quarterly forecasts. Also, in a Discounted Cash Flow model, the terminal value has the largest impact on valuation. The terminal value will be highly inaccurate when analysts do not understand how and when such technologies will reach rapid cost deceleration.
ARK looks over a longer period: 5 years. They seek to understand the mechanics of how the cost declines occur and also to understand the elasticity of the demand. Their methodology intends to find “mispriced assets” that are not seen by conventional analyses.
Second, their team of analysts are assigned by technology rather than by sector. Their thesis is that disruptive technologies are cross sector technologies.
For example, they don’t look at electric vehicles fitting into the auto industry; the valuation is mispriced by looking at it in that sector. If electric vehicles are a platform, they open up markets impacted by ride sharing and battery storage.
Similarly, if Square is considered to be in the banking sector, it will be treated differently by analysts than in ARK’s perspective, which looks at Square’s mobile wallet technology and its cost of customer acquisition versus that of a traditional retail bank.
A final example is how Illumina, the maker of genetic sequencing machines, is considered by investors as an industrials company in the same fashion as a Danaher, which is not their way of looking at Illumina.
In my March 2019 post, I noted that Joseph Davis, chief economist and head of investment strategy for Vanguard Group, found genomics to be the one technology field that jumps off the charts over all other technologies, even over computing technologies. ARK furthers this approach to uncover the actual companies building disruptive businesses in the genomics field for its ARK Genomic Innovation fund.
To do this type of analysis, Brett Winton said they don’t select from the same pool of candidates as that of typical investment firms. Typical investment firms hire MBAs and those with traditional analysts’ backgrounds. While these are smart people, their mindset is biased to the traditional investment industry. This cuts out the creativity required in a smart person to derive a different analysis. They often screen out the Wall Street profile in favor of someone with an idiosyncratic view. To provide an example, Brett said they will soon hire someone without a college degree.
Winton notes, when it comes to disruptive technologies, analysis can suffer from a “failure of the imagination.”
This leads to the third and final point: ARK’s research is open and transparent. They publish prolifically and they even make their company financial models public.
Their practice is about expanding the information footprint. Information attracts information, which opens challenges to their assumptions, and raises points they overlooked. The objective is to reach better conclusions.
Cathie Wood’s research team’s investment theses are indeed unconventional. So was Mary Meeker’s approach in her time. Their theses tell us about technology and innovation and where the world is going.
The number of disruptive technologies has increased
Since the beginning of human history, the number of general purpose technologies that affect an entire economy appeared once a millennia, then once a century, then a few times a century, then once a generation. The pace of technological advancement is accelerating.
In Mary Meeker’s time, there was the Internet. In Cathie Wood’s present day, they have identified genomics, robotics and automation, financial technologies, the next generation Internet, and now space technologies. If you agree with this perspective, we are at the dawn of multiple disruptive technologies happening at the same time.
Interpret not what the analysts say, but what the founding CEOs they cover do
The dot-com bubble ended in a bust. For a short time thereafter, Mary Meeker was a pariah.
Brett Winton said to his interviewers recently, “Could we look dumb 12 months from now? Some people will think ARK is a scam. Our discipline and mission is always to say what we think.”
If they have identified the disruptive and leading companies of the time, I feel that it is those CEOs actions which are more telling about the future and about future opportunities. They deal with business at the operational level and they execute on company direction. Their impact and legacies are enduring.
Marc Andreessen, co-founder of Netscape, went on to found Loudcloud in 1999. He foresaw the advent and potential of cloud computing well before cloud computing became critical growth drivers for many important tech companies today.
Jeff Bezos, co-founder and CEO of Amazon, exploited the seminal globalization event of its era.
As economist Paul Krugman notes: rising globalization requires more than technological progress in transportation; it requires progress in transportation that is faster than technological progress in domestic production. This was the case from the mid-1980’s to 2008.
The convergence of container ships, shipping port design, and intermodal transportation accelerated globalization. These innovations made shipping so cheap that they created global supply chains that had profound economic and social consequences.
These supply chains moved labor to cheaper markets, brought cheap consumer products to customers, enabled just-in-time manufacturing of complex industrial products, and enabled Apple to create beautiful devices on an unprecedented scale to become the world’s first trillion-dollar company.
The goods enabled by these supply chains—and these supply chains themselves—enabled Jeff Bezos’ Amazon to become the world’s second trillion-dollar company.
Globalization as we have all known it in our lifetime has been about the movement of physical goods. There are additional nuances, such as provision of services over the Internet, the lifting of populations out of poverty, and also the dislocation of jobs.
What is common across all these themes of globalization is that it is transactional: buying and selling of goods and services, and arbitrage moving economic value across markets with certain social consequences that are not always positive.
The nature of globalization is now changing
Cathie Wood’s top holding is Tesla. Last week, Elon Musk confirmed that Tesla will make electric vehicles in India. The company is setting up operations near Bangalore, reportedly because this city is an emerging hub in India for electric vehicles and aerospace manufacturing talent.
Tesla is already manufacturing and selling in China. That is simply a growth opportunity for the company to sell more product.
By comparison, local automotive analysts note that the luxury car market in India is small, accounting for 30,000 to 50,000 sales annually. They further note that India is a long way from a charging infrastructure.
Normally, I would discount this Tesla news as noise. The execution risk of succeeding in such a venture in India sounds insurmountable.
Yet, if Cathie Wood’s thesis of disruptive innovation plays out, the deployment of electric vehicles should not be considered as an auto industry scenario, nor even one of transportation. It is a platform that impacts markets such as battery storage, ride sharing, and other businesses that will be peculiar to India.
Based on the track record of some companies in ARK’s portfolio, this thesis is very plausible. If it plays out, it is a significant bell weather scenario of how globalization will change again, profoundly. No longer will globalization just be about buying and selling transactions and the movement of goods and labor.
It will be about the deployment of technology platforms that will be transformative to their economic geographies. In this case of Tesla, it will be electrification. Any other disruptive technology—genomics, financial technology, automation and robotics, and of course the next generation Internet and more—are all fair game.