#15. Cathy’s Ark
January 31, 2022
Cathie Wood has grown to fame over the last two years through her fund Ark Investment Management. Ark has grown alongside the stock price of its portfolio companies driving “disruptive innovation” such as Tesla, Coinbase, Teladoc. Ark has ETFs focused on specific sectors like genome editing ($ARKG, holding companies like CRISPR Therapeutics), space exploration ($ARKX, holding companies like Trimble), autonomous robots ($ARKQ), and so on. Wood has grown to be as much of a mainstream character as an ETF manager can. Ark’s annual Big Ideas publication has been aiming to be the next Internet Trends Report from Mary Meeker. But Ark’s flagship ETF, Ark Innovation ($ARKK), has been taking a walloping.
Ark Innovation peaked at $158/share last February - up 2.7x from 12 months prior. Since then? It’s fallen over 50%. 27% this month alone. And Wood’s other Ark ETFs have faired more or less the same. Michael Burry, famous for his character’s expose in The Big Short, has made $31m shorting $ARKK. Social media is full of the I told you so’s you’d expect from an established based smiling and pointing at a differentiated strategist who flew too close to the sun. The largest gripe, which echos larger sentiment in our bull run, is that unprofitable companies will not make good public market investments.
Many (not all) of the companies that Ark is attracted to are pushing the boundaries of what humans can technologically do. These admirable research-cum-companies are run by the creative and mad scientists who are building a world beyond “the next big thing in social media.” They’ve gotten a huge boost from public markets in the recent bull run. A run that has not only supported Ark’s companies, but many companies taken public via SPAC in battery technology (Quantumscape, Fisker), quantum computing (IonQ, Rigetti), and space (Virgin Galactic). These companies won huge capital infusions and important liquidity to continue important and ambitious work.
However, assuming sentiment for (or against) Ark is emblematic of broader market sentiment (Ark Innovation’s AUM has shrunk 55% in the last year), companies going after ambitious science projects may be in trouble. It stands to reason that investors interested in free cash flow fundamentals wouldn’t have an appetite for quantum computing or nuclear fusion companies on the public market. The question becomes how do we fund these in the future?
Assuming a market downturn and less room in a public market, it would stand to reason that the private market and VCs take a larger role supporting these companies. Although there is certainly room for more VC capital backing ambitious companies, funding today is at an all time high. Not only that, but the LPs of many of these funds are asset managers who invest in both public and private equities. If public markets decline, that creates an imbalance in their portfolios where liquid public equities don’t represent as much of the portfolio as they should. So these asset managers will need rebalance their portfolios out of private equities. Meaning there will be less money going into VC and thus into these science project companies that are no longer getting support from public markets.
Who cares? Well we all do. These are companies creating a future with limitless clean energy (nuclear fusion), eliminating genetic diseases (CRISPR), and understanding our world in a way we never have before (quantum computing). Ambitious and admirable projects that, if successful, will be hugely valuable companies. However, if neither public markets nor private markets will have them, they transition from for-profit companies moving in hyperdrive back to grant-funded projects slowing to the pace of government administration. Or more likely, they wither away altogether.
The future for our science project companies is unsure. They can’t show revenue. The best they can do is make and advertise meaningful progress so as not to be abandoned in a down market. These updates (and their publication) are crucial to the industry and larger scientific progress and commercialization. In the next few months, we’ll see how willing investors are to give up short term cash flow for long term value.
