While rising rates and sticky inflation may have put a damper on growth stocks in recent years, Ark Invest founder and CEO Cathie Wood is confident that they are primed for a rebound as innovative new technologies like artificial intelligence act as a major deflationary force.
“Innovation solves problems—especially AI,” Wood, whose firm has roughly $15 billion in assets under management, said in an interview at the seventh annual Forbes/SHOOK Top Advisor Summit at the Encore At Wynn hotel in Las Vegas on Wednesday. “We do believe that most advisors and asset allocators are short on exposure to disruptive innovation.”
She remained steadfast in defending her playbook of investing in disruptive technology and growth companies, which have rebounded from last year. While Wood’s flagship fund, the Ark Innovation ETF, has struggled in recent years—losing 24% and 67% in 2021 and 2022, respectively, her portfolio is starting to bounce back.
The fund is up nearly 25% so far this year, compared to just 11% for the S&P 500. What’s more, over the long term, the fund still boasts a solid track record with an annualized return of just over 10% since inception in 2014.
Wood made a big name for herself after her flagship fund, the Ark Innovation ETF, returned more than 150% in 2020 amid the pandemic by investing in “disruptive innovation” stocks like Zoom, Roku and Teladoc. As high-flying pandemic stocks eventually crashed back down to earth, however, Wood’s flagship fund lagged the S&P 500 index by more than 30 basis points in both 2021 and 2022. Tech stocks were particularly hammered by the Federal Reserve’s decision to embark on an aggressive interest rate-hiking campaign last year, though they have since recovered, helping lead the market higher this year.
Similar to last year, Wood believes her fund will outperform the market as tailwinds from innovation trends act as deflationary forces and boost growth stocks. She pointed out that while inflation is correlated with higher oil prices, which have risen over 40% since their lows this summer, gas futures are down significantly. “This tells me that there is tremendous demand destruction,” Wood said.
The strength of the U.S. dollar is another powerful deflationary force, she pointed out, especially at a time when there are tremendous liquidity concerns in the rest of the world, particularly in countries like China and Japan.
While Wood argued that a broadening of innovation in the marketplace will help contribute to deflation and contribute to future growth, that doesn’t mean the economy is set for a soft landing. “We’re going to have a harder landing than most people expect—particularly in the rest of the world but also in the U.S.,” Wood predicted. That said, she is “not at all worried” about an environment similar to the great financial crisis in 2008. The Ark Invest founder points to the fact that there has already been a lot of weakness in areas of the economy such as housing, auto sales and inventories.
The innovation investor described a “convergence” of several new and exciting technologies which she predicted will fuel exponential growth in the future: Artificial intelligence, robotics and energy storage. Costs are declining across all three technologies while the respective S-curves of growth are “feeding into each other,” she argued.
For some companies like Tesla, AI will accelerate growth from already rapid levels, Wood predicted. “We really haven’t seen anything yet,” she said, adding that most of Wall Street still misunderstands that Tesla will be a major beneficiary of AI. Wood currently estimates that the electric vehicle maker will hit a share price of $2,000 by 2027.
Other stock picks that fit into this theme include companies like video conferencing software Zoom and virtual healthcare company Teladoc, both pandemic-era darlings which Wood first bought shares of in 2020. She also likes New York-based UiPath, a $1 billion dollar revenue company which specializes in robotic process automation; It is now her fifth-largest position, currently worth nearly $500 million.
One of her most recent portfolio additions in the AI theme, meanwhile, is air taxi company Archer Aviation, which is developing an electric vertical take-off and landing (eVTOL) aircraft to use to transport people around cities. San Jose, California-based Archer is currently losing money but has a market capitalization of nearly $1.3 billion.
Not all AI opportunities are equal though. Wood has recently continued to trim one of her longest holdings, chipmaker Nvidia, even though it is poised to benefit from the trend. She sold nearly $4 million worth of shares earlier this week, citing risks such as excessive valuation after the stock’s massive 200% runup so far in 2023.
Wood has also recently taken profits on several other longtime holdings, namely Tesla, e-commerce giant Shopify and sportsbook and casino operator DraftKings.
“We are earning our way back from last year—a lot of our companies’ earnings and revenue have started to surprise to the upside,” Wood said at the conference. “It’s uncontroversial to own cash right now, but that’s a short term instrument—deflationary forces brought about by innovation will cause rates to go down and that’s good for growth.”
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