This season of “The Switch” is focused on making a case for disruptive innovation. In this episode, hosts Cathie Wood, CEO for ARK Invest, and ETF Trends’ CEO Tom Lydon and CIO Dave Nadig discuss how to identify transformative technologies.
Wood dives in by explaining how ARK Invest differentiates innovations from movements that are just fads. ARK looks for what they call an “innovation platform,” something that is categorized by the following three characteristics: falling costs associated with the learning curve of new technology, crossover into multiple or all sectors within the economy, and the innovation’s ability to kick off further innovations based upon the original.
Wood uses the example of DNA sequencing to showcase the process. Costs are incredibly deflationary within DNA sequencing; “For every cumulative doubling in the number of whole human genome sequence, costs are dropping 40%,” Wood said. It’s also an innovative technology that spreads into multiple sectors, not just human health but also agriculture, both in the realm of livestock and animals and that of plants and crops. As far as launching new technologies, CRISPR and other gene-editing technologies would not exist today without the innovations of DNA sequencing.
Wall Street can often get swept up in innovative fads that, on the surface, are new and exciting but might not have an actual lasting impact. One such example Wood gives is Brunswick Bowling and the automation of the bowling alley and how excited investors were for this innovation.
Despite all of the excitement, “there was very little money made off of that,” Wood explained. “There was just too much capital chasing too few opportunities, and at the end of the day, the returns were very, very disappointing.”
The focus was on the automation application, in this case, the bowling alley, whereas automation itself should have been the innovation platform. Indeed, automation is one development that Wood describes as an innovation that is currently “turbocharged” by supercomputers and AI.
Honing In On Innovators
Finding innovation platforms is a skill that ARK has honed over time, and despite looking across all market caps constantly, ARK can sift through quickly to find the innovators. “We know what the enablers and beneficiaries of these new technologies are going to look like,” Wood said, and because these innovators are easy for ARK to identify, stock selection becomes a much easier process, according to Wood.
ARK’s primary focus is on unit growth. So the cost reduction aspect of innovation is one of the most critical components because reduced cost equates to reduced prices and enables the participation of more sectors.
The companies that ARK invests in are also high revenue growth ones. “We are not interested in companies which have revenue growth in the single-digit range. Our average revenue growth, I’m going to say it’s about 25%, give or take, 25% at a compound annual rate,” Wood explained. This tends to be the mark of a company that is driving innovation.
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