Investors who are interested in innovative ETF solutions should take a look at ARK Invest’s research process, and how ARK approaches cost decline modeling and company valuations.
In the recent webcast, How Autonomous Tech Will Shape the Future, Tasha Keeney, director of investment analysis and institutional strategies at ARK Invest, explained ARK Invest’s Iterative Investment Process that combines top-down and bottom-up research to give investors their final results. Specifically, ARK Invest identifies disruptive innovations through a potential universe and aims to select the best-in-class companies while adjusting for changes in conviction and trading around market volatility.
Keeney added that as a result of extensive and iterative research steps, ARK aims to quantify multi-year value-chain transformations and market opportunities. ARK models cost curves and calculates the elasticity of demand to identify entry points for tech-enabled disruption across the markets. ARK’s bottom-up research includes a company investment brief, a valuation model, and ARK’s company scoring. Valuation models are also informed by top-down and bottom-up input.
In addition, Keeney outlined ARK’s portfolio management methodology that uses a proprietary scoring system to value companies and monitor the underlying investment thesis. Analysts update company scores during weekly stock meetings as needed. Within each portfolio ARK tracks a stock’s “thematic relevance” to evaluate its position. Specifically, these themes include:
- Company
- People
- Culture
- Execution
- Barriers to Entry
- Product and Service Leadership
- Valuation with a 5 Year Price Target
- Thesis Risk
Looking at innovations that could shape our future ahead, Sam Korus, director of research, autonomous technology, and robotics at ARK Invest, highlighted the autonomous ride-hailing technology, which could soon become extremely affordable. To put this innovation in perspective, adjusted for inflation, the cost of owning and operating a personal car has not changed since the Model T rolled off the first assembly line. ARK estimates that, at scale, autonomous taxis could cost consumers as little as $0.25 per mile, spurring widespread adoption, compared to the $0.70 per mile for gasoline-powered automobiles today.
Korus argued that autonomous ride-hailing could win market share of miles traveled even from current car owners. ARK’s research suggests that consumers value the time they spent driving in the $0.60 – $1.10 per mile range. On average, consumers value time in work-related travel more highly than non-work travel. Today, consumers pay $2 per mile on average for ride-hail, significantly more than the marginal cost of driving a personal car and the perceived value of their time.
“ARK’s research suggests that the value consumers place on their time and on convenience will support prices for autonomous ride-hail higher than our estimated price floor of 25 cents per mile. We expect tiers of service to emerge at different price levels,” Korus said.
In the future, ride-hail demand could become an $11 trillion addressable market. By 2026, ARK Invest projects the enterprise value of autonomous ride-hail platforms could be much higher than even that of automakers today. Korus even believed that autonomous ride-hail could have more economic impact than any innovation in history as the sector could add about $26 trillion to global GDP by 2030.
The sector would improve efficiency and cost across the board. According to ARK’s research, autonomous vehicles will operate at higher utilization rates than human-in-the-loop systems, creating more cost-effective delivery systems, particularly for small volumes in the last mile. For example, drone delivery should be more efficient and cost-effective in transporting goods and meals, especially for suburban and rural residents, increasing food delivery as a percent of total spending on food.
“ARK’s research suggests that autonomous logistics will reshape the global supply chain completely, giving consumers faster and more convenient ways to receive goods,” Korus said.
Korus also highlighted the potential of the robotics and autonomous machines market as more industries adopt the technologies. In response to the China/U.S. trade conflict in 2019 and supply chain bottlenecks during 2020 and 2021, the penetration of industrial robots probably will gain more momentum, according to ARK Invest. 3D printing and robotics offer cost reductions, tools for innovation, and increased productivity. Supply chain and labor disruptions could accelerate the shift to next-generation manufacturing technologies.
Investors who are interested in the autonomous tech and robotics theme can look to something like the ARK Industrial Innovation ETF (NYSEArca: ARKQ). ARKQ is an actively managed ETF that seeks long-term growth of capital by investing under normal circumstances primarily in domestic and foreign equity securities of autonomous technology and robotics companies that are relevant to the fund’s investment theme of disruptive innovation.
ARKQ’s underlying components are focused on and are expected to substantially benefit from the development of new products or services, technological improvements, and advancements in scientific research related to, among other things, energy, automation and manufacturing, materials, artificial intelligence, and transportation. These companies may develop, produce, or enable autonomous transportation, robotics and automation, 3D printing, energy storage, and space exploration.
Financial advisors who are interested in learning more about innovative technology can watch the webcast here on demand.