Ark’s Cathie Wood: 5 Big Investing Ideas for 2021

Cathie Wood, head of Ark Investment Management, has been covered extensively as an ETF fund manager who seems to understand the market intrinsically. Her returns have bypassed those of other managers on the Street: Her ARK Innovation ETF was up 149% in 2020.

By early February this year, she had more than $50 billion in assets, up from $3 billion a year ago. Wood’s ETF inflows are second only to Vanguard’s thus far in 2021.

Her method includes good timing and a different kind of research. She defines her goal as identifying “large-scale investment opportunities by focusing on who we believe to be the leaders, enablers, and beneficiaries of disruptive innovation,” as she writes in her Big Ideas 2021 report.

“While we believe innovation is the key to growth, the opportunities it creates can be missed or misunderstood by traditional investment managers who are more focused on sectors, indexes, short-term earnings, and price movement,” she writes.

What’s the key to Ark’s success? To get a “deeper understanding of the convergence, market potential, and long-term impact of disruptive innovation by researching a global universe that spans sectors, industries and markets. Today, we are witnessing an acceleration in new technological breakthroughs.”

Wood states that not every disruption will be successful, and there are “uncertainties that may impact our projections and research models.” These risks include the rapid pace of change, exposure across sectors and market cap, regulatory hurdles, political or legal pressure, and the competitive landscape.

With that in mind, she and her team boldly provide 15 “big ideas” they’ve selected for 2021 and why they think they would make outstanding investments. Here are five of those innovations:

1. Deep Learning

Artificial intelligence isn’t new, but Ark sees it adding $30 trillion to global equity market capitalization in the next 15 to 20 years, which is three times more capitalization than the internet created.

One reason is that “deep learning” or AI is moving from code written by humans to code written by data. Before picturing ”The Terminator,” think more in terms of software created by AI that has already developed self-driving cars or, say, Alexa. Wood notes that even the app TikTok already uses deep learning for video recommendations.

Yet the cost of AI training modes are “likely to increase 100-fold, from roughly $1 million today to more than $100 million by 2025,” which means a need for AI chips and data center spending on AI processors (climbing from $5 billion today to $22 billion in 2025). Once deployed, Ark expects deep learning to be available to all industries, not just large internet companies.

2. Virtual Worlds

Gaming is hot, and another technology that isn’t new but still in its infancy, “virtual worlds,” will “compound 17% annually from roughly $180 billion today to $390 billion by 2025,” Ark projects.

One reason is independent systems today will become “interoperable, culminating in what futurists have deemed ‘The Metaverse.’”

The movement has already started, with “in-game” purchase revenues going from 20% of total global gaming revenue in 2010 to 75% in 2020 vs. premium games revenue. Ark defines in-game revenue as expansion or content packs, power-ups, playable characters, etc. — those products purchased while in the game.

Also, time spent playing video games is a factor: Now it is 1.1 hours per person a day, which Ark says will expand to 1.5 hours in the next five years. If the trend continues, in-game purchase revenue could compound 21% annually in the next five years to $350 billion by 2025.

In a similar vein, Ark sees “virtual reality” approach “reality” by 2030, which means global gaming revenue could hit $365 billion by 2025. Augmented reality and virtual reality could grow at a 59% compounded annual rate in the next five years to $28 billion in revenue.

3. Digital Wallets

Bankers beware, as Ark states that Venmo, Cash App and other startups of this digital wallet ilk will “upend traditional banking by activating the mobile phones — the bank branches — in users’ pockets and handbags.”

Ark believes that today those digital wallets are valued between “$250 and $1,900 per user today but could scale to $20,000 per user, representing a $4.6 trillion opportunity in the US by 2025.”

China is an example of this escalating growth in mobile payments, exploding 15-fold in five years to an estimated $36 trillion, Ark states. That’s three times the size of China’s GDP in 2020.

And Venmo’s annual active users hit roughly 69 million in 2020, versus Chase’s 60 million deposit account holders.

One of the primary drivers of this explosion is the lower acquisition cost with digital wallets, which is $20 per user versus $350 to $1,500 for retail bank checking accounts or $750 to $1,000 for brokerage platforms, the report states.

Also, Ark notes that digital wallets are entering the unsecured lending market, which means major competition for traditional bank lending.

4. Bitcoin Fundamentals and Corporate Acceptance

The cryptocurrency seems to have gained more trust, with some companies considering it cash on their balance sheets. In fact, Tesla purchased $1.5 billion in Bitcoin and plans to accept it for purchases.

Today Bitcoin is at record highs of roughly $55,000. Ark notes that if only 1% of S&P companies allocated cash to it, Bitcoin could increase in value by approximately $40,000.

As the market matures, though, the hype has decreased. And Ark sees Bitcoin having  “one of the most compelling risk-reward profiles among assets.” Its research shows it could scale from $500 billion to $1 trillion to $5 trillion in network capitalization over the next five to 10 years.

The signs show the cryptocurrency’s “credibility.” Ark points out that even the Office of the Comptroller of the Currency permits national banks to hold “reserves” on behalf of customers who issue stablecoins. Also, big players either are investing in it (hedge fund star Paul Tudor Jones) or using it for collateral for cash loans, such as Fidelity Digital Assets.

5. Multi-Cancer Screening

The convergence of innovative technologies has pushed the cost of multi-cancer screenings down 20-fold, from $30,000 to $1,500, Ark writes, and the firm expects it to drop an additional 80% by 2025. This lower cost could scale the multi-cancer screening market to $150 billion in the United States.

More importantly, multi-screening protocols could prevent 66,000 cancer deaths per year in the United States alone.

Early detection means better survival rates, and though metastatic cancers account for only 17% of new cases, they cause 55% of all cancer deaths while having a weighted survival rate of 24% vs. 89% for localized cancers.

According to the Ark report, a single blood test can detect “dozens” of cancers. Also, the rapid cost decline of next-generation DNA sequencing is enabling liquid biopsies and advancements in synthetic biolog that helps clinicians find faint signals of cancer in high-noise environments such as the bloodstream.

Pictured: Cathie Wood, founder of Ark Investment Management. (Photo: Bloomberg)