Yahoo Finance’s Julie Hyman sits down with ARK Invest Founder & CEO Cathie Wood in Miami at the Exchange: An ETF Experience conference to discuss her fund's performance, crypto investing, and her vision for the future of the auto sector.
JULIE HYMAN: So Cathie Wood of ARK Invest. Thank you so much for being here.
CATHIE WOOD: Oh, thank you, Julie.
JULIE HYMAN: This is great.
CATHIE WOOD: I'm happy to be here.
JULIE HYMAN: So I'd like to start with what's in the news first, if we might. And specifically, Twitter.
CATHIE WOOD: Yes.
JULIE HYMAN: I did see in your holdings, if I'm not mistaken, in your benchmark fund, you don't own Twitter anymore. First of all, tell me if that's correct.
CATHIE WOOD: That's
JULIE HYMAN: And if-- it is correct.
CATHIE WOOD: That is correct. So our flagship fund, we don't own any Twitter. And we've started moving out of most of the social platforms because there's a lot of competition out there, number one. I think Meta platform, so Facebook. The sharp deceleration in its revenue growth to somewhere we think-- or their guidance was three to 11% for the first quarter, that was shocking. And really brought to light, TikTok is taking a lot of oxygen out of the room.
And Twitter also, I would say, the management change was another reason for us. Whenever we see big management changes, typically we're going to expect this new executive. Even though he was the CTO, putting his own mark on the platform. And so that causes some uncertainty. And I feel like Jack's leadership was very important to evolving Twitter to where it was.
And his idea of even opening up to crowdsource the oversight of the behavior on the platform. We thought that was moving in the right direction. And Parag's first few, or the first few things we saw after his arrival, was more censorship. So you know, one thing after another.
JULIE HYMAN: Speaking of crowdsourcing about Twitter, Elon Musk of course, with his back and forth. But he's been doing some crowdsourcing, right? He did some various polls on Twitter, asking if there should be an edit button, et cetera. But what do you make of his back and forth, right?
He took the stake in Twitter, was going to be on the board. Then they said, never mind, he's not going to be on the board. What does that tell you about both Elon Musk, but also about Twitter?
CATHIE WOOD: Well, it probably tells us more about the regulatory environment. It could be that Elon wants the freedom to speak freely about Twitter. And how he thinks it should evolve. And as a director he might actually be hamstrung. And I think that's the primary reason. We don't know the real reason, but I would imagine that's top of mind.
JULIE HYMAN: Is there anything that would get you back into that stock or into social media more broadly?
CATHIE WOOD: Well, one of the reasons we did hold Twitter is, we thought, because of its verification roots, that it would be a good platform for NFT verification. And they've talked about it to some extent. If we saw Twitter insinuating itself into that world, aggressively, we might become more interested. But I am interested in seeing how they do evolve the platform. Should it be a subscription service, as opposed to advertising? Taking away advertiser fears that they're going to be put next to some content they don't want to be associated with? Subscription, that would be a huge transition. Might be interesting though, might be interesting.
JULIE HYMAN: And switching away from Twitter, more focused on Elon Musk for a moment. Because obviously, you have been a Tesla supporter for a long time. And I guess, by proxy, an Elon Musk supporter for a long time. I'm always fascinated by Musk, the troll, versus Musk, the innovator and leader.
Because both of those, obviously, are part of him. His sort of trolling effect on Twitter, et cetera. Is there a point at which it tips too much, and it starts to concern you as an investor?
CATHIE WOOD: So we've thought carefully about this. And when it comes down to Tesla, the stock, the company and the stock, we pay a lot of attention to its barriers to entry. And as long as we see those moving up, and they are moving up. Whether you're talking about battery technology, it's going to take a long time to catch Tesla. And what I mean by that is the traditional automakers.
It's the only company that has designed its own AI chip for autonomous driving, taking a leaf from Apple's book. Apple was the only company to design a chip for a smartphone, a computer in our pockets or pocketbooks, and change the game. We think autonomous will change the game. And in terms of artificial intelligence, critical to success is high quality data. And it has more data-- orders of magnitude more data than all of the auto and technology companies combined going after this space.
JULIE HYMAN: I mean, it's interesting to me because in some other industries you've sprinkled your holdings around in the Crypto space. For example, or in the online brokerages, I think of. But in EVs less so. You're in Tesla. I believe you're in NIO and XPeng to some extent as well.
Do you think that, as you say Tesla is so far out ahead, but do you think it's also more of a zero sum game in EVs? That Tesla's just going to be so dominant for so long, that the others are not going to be able to catch up?
CATHIE WOOD: Well, I do think from a cost point of view, it's vertical integration has given it a tremendous advantage. Relative to other companies who are used to outsourcing everything. And so in terms of the winner take most, that's not as much about EVs. It's about autonomous, because that is a winner take most opportunity. And so the company with the best AI expertise, and the largest bodies of high quality data.
And the domain expertise associated with battery technology, because autonomous will be electric. The electric transportation future. Those companies are going to win, and there aren't going to be many of them. Our confidence is highest in Tesla.
But I must say, I joined our analysts and went out to GM to meet with a full day of meetings with Mary Barra and her extended team. We have one more meeting with Cruz, which is, of course, in San Francisco. But I'm fascinated by how Mary Barra is really turning that ship around. And very focused on cruise automation and leaving it alone. Now Kyle, the founder, is back as leader, and watching them make San Francisco autonomous work.
So now we get the question, autonomous, that's never going to happen. Well, it has. Cruise automation is in San Francisco, which is a complicated city. And they're making it work. Waymo has done the same but in a less crowded situation in Arizona. I'm really impressed with Cruz. So we're taking a close look at that as well.
JULIE HYMAN: And there is just a viral video of police pulling over an autonomously driven vehicle. Does that mean you're considering investing in General Motors?
CATHIE WOOD: We have an open mind. And one thing we have to be careful not to do, we must not have a closed mind. And when we see success, we have to acknowledge it and learn a lot more about it. So we're still on a fact-finding mission.
JULIE HYMAN: I want to come back to NIO and XPeng too.
CATHIE WOOD: Yes.
JULIE HYMAN: Because what's your view of those. Obviously, they're mostly still in China. NIO in particular, I think XPeng in particular, has been trying to expand outside. Are they going to be bigger players? What's your thinking on them going forward?
CATHIE WOOD: So as we were pulling out of China largely, thinking about common prosperity. What does that mean? It means a couple of things. We think high margin companies are on the government's radar, as this idea of common prosperity. Cut your margins to increase access. So we're looking for very low margin companies, not normally what we look for.
JULIE HYMAN: That won't have big targets on their backs.
CATHIE WOOD: Yes, that won't have-- but are going to increase the access to transportation. And both of them are going for autonomous now. Tesla, of course, is in China. But we would be surprised if the Chinese government wants Tesla to lead in the autonomous race. We know XPeng is patterning itself after Tesla.
So that was our first buy. But NIO is-- they're right in there, both of them. NIO on the design side is absolutely fabulous. And it's a little higher end. So we're splitting our bets there, thinking that those will be the autonomous-- one of those are two of them will be the autonomous champions.
JULIE HYMAN: We've been talking about some of the winners, Tesla in particular. But of course, we have to acknowledge that ARK has not had a good-- well, didn't have a great 2021, and the first quarter of this year wasn't so great either. I was looking at one analysis of your top 12 holdings that was looking at the average cost per share. And Tesla was the only one that is not underwater of those holdings.
Does it, for lack of a better word, does it trouble you? Does it freak you out? How do you think about that? When you're underperforming, how much stress is that causing in the halls of ARK Invest?
CATHIE WOOD: Yes. You'd be shocked to see how calm and focused everyone is. We're focused on our research. Are we getting this right? We have a five year investment time horizon. So if you look at the last five years, including the first quarter waterfall performance, the last five years we have handily outperformed the NASDAQ, the S&P.
So five year time horizon is not just looking back but looking forward as well. AND putting this recent performance into perspective, you'll note that during COVID. So from April, whenever the market bottomed, through February of 2001, our flagship strategy was up almost 360%. No, I'm sorry. Yeah, 360%.
Down 60% from that at our worst, very tough. And I'm thinking about our clients. And I've been extremely gratified, we all have, that for the most part they've stuck with us. Last year, our net inflows were $17 billion. Most of that weighted at the beginning of the year.
So they have felt the full force of this decline. And yet we in-flowed last year, and we're in flowing this year. That has been shocking to a lot of our counterparts out there, who have gone through periods like we've just experienced and have had massive outflows. And a few things are at work. Number one, our long term time horizon is practically the first thing we say, when we're talking to prospective investors.
Number two, if I were to have told you in February-- or talk to you in February of '21. Even at that point in time, given our projections for the next five years, we expected our flagship strategy to deliver a 15% compounded annual rate of return. So about double the market over time. Today, after this decline, our projections have if anything they've increased.
Because artificial intelligence breakthroughs are moving so much faster than we expected. So our expectations for future returns have gone up, as the prices have come down. So today, we expect-- now consider the source. This is our research, and these are our expectations. And we could be wrong.
But whereas it was 15% last February, that number today is 50%. 50% of the compounded annual rate. And it's because what we believe the market does not understand, is we have entered the sweet spot of exponential growth trajectories. Most of the market thinks in linear terms. Most of our careers we've experienced primarily linear growth.
Growth that slows down, decays to the nominal GDP growth rate over time. We have a few experiences with exponential growth. Amazon is a very big one. When we were buying Amazon in '03, what we were saying to investors is, if you believed Amazon could grow anywhere in to 30% range for the next 20 years, would you buy it? You put that into a dividend discount model, you would buy that all day long. But that's not how people were thinking about it.
JULIE HYMAN: Well, and as you're talking-- you effectively have to retrain investors, right? Investors over the past decade, two decades, have been trained to expect that pop. To expect short term returns.
CATHIE WOOD: Yes.
JULIE HYMAN: How do you retrain them to focus more on the longer term, especially when there can be a lot of short term pain?
CATHIE WOOD: Yes. Well, I think the market is going to train them over time now. So over the last 20 years, as you say, the market has outperformed the majority of active investors. The vast majority. And so that is career risk for a lot of-- so we've had now a lot of benchmark hugging.
Because it's been the right place to be, the market's, the broad based indices. If we're right on the amount of disruptive innovation that is going to disturb the traditional world order, the broad based benchmarks are not going to be the place to be. Now they'll always be tried and true. There are some stocks that are going to be able to weather all of the disruptive innovation that we see. Because they have great management teams.
But so many companies in the broad based benchmarks have gotten used to giving investors a little adrenaline with manufactured earnings, share buybacks, or increasing dividends. And they've leveraged up to do of that. And they have not invested enough in innovation. For the kind of innovation-- to participate in it, in the innovation we see ahead, companies have to sacrifice short term profitability. And invest aggressively.
Because we are in a lot of winner take most opportunities, because of artificial intelligence. So if we're right, then in between now and 2030, this is in our big ideas on our website. Between now and 2030, the market cap associated with truly disruptive innovation is going to move from $10 trillion today, which is less than 10% of the market, to 210 trillion. This is just in eight years.
So that's a 30% to 35% compounded annual rate of return. And that kind of disruption to the traditional world order, is going to mean sub par returns for the indexes, if we're right.
JULIE HYMAN: Right. I guess the question is, when does that start to happen, right? Because as somebody who's a markets veteran, you can be right all day long. But if the market doesn't think you're right--
CATHIE WOOD: Then you're wrong.
JULIE HYMAN: Right, exactly. So especially being in a rate hiking cycle, which has proven to be very challenging for many of these high growth companies, when are we going to see that catch up that you're describing?
CATHIE WOOD: Well, I think, we started to see it during COVID. Innovation solves problems.
JULIE HYMAN: But we weren't in a rate hike cycle during COVID.
CATHIE WOOD: We weren't. In fact, quite the opposite. Florida the accelerator on fiscal and monetary policy. But in terms of igniting innovation trends or accelerating them, started back then. And because of tough comparisons with COVID, there's been a question. Is this really disruptive innovation? Or are these stay at home stocks?
We spend all of our time focused on disruptive innovation and making sure we're on the right horses. And we've spent the last year consolidating our flagship strategy, from 58 names to 35 names. So these are our highest conviction names. And we've sold 22 stocks who are saying, OK maybe we don't have all the assumptions right.
So we started during COVID, went through this-- are these stay at home stocks? Or is this truly disruptive innovation? I think we're going to see a re-acceleration of revenue growth, now that we're moving away from the tougher comps. Zoom and Teladoc are two poster children for those, inviting a lot of questioning from that angle.
And as far as the rate cycle, the interest rate cycle, if you look at history-- and I actually had a value manager tell me this, who was cheering us on as a lot of people were not, shall I say. And he's a client and wrote an email saying, I have looked into this. And it is not your ilk of stock that gets hurt during interest rate hiking cycles, it is mature growth. Mature growth companies that experience most of the pain. Well of course, we've had a lot of pain for a lot of reasons.
JULIE HYMAN: Right.
CATHIE WOOD: But we also have more problems. Russia-Ukraine, food, energy prices. We can help that. Our strategies are all about solving problems. Electric vehicles are going to help us move away from energy.
Right? Bitcoin mining, as part of utility ecosystems, is going to accelerate the shift towards renewables. And the genomic revolution is going to help us grow food in areas, maybe away from Ukraine. As it's in quite a bit of turmoil, in other areas, that are not as friendly environmentally to food production. So innovation solves problems. That's all we do.
We've got a lot of problems. And inflation is another problem. We don't think it's going to be long lasting. But if it is, and if one of the reasons is a labor shortage, automation, artificial intelligence, robotics solves problems.
JULIE HYMAN: I got to come back to Zoom, though.
CATHIE WOOD: OK.
JULIE HYMAN: Since you mentioned it. Zoom became so entrenched in our lives so quickly, it doesn't feel innovative anymore.
CATHIE WOOD: That's what's so interesting is--
JULIE HYMAN: But where does the next-- how do we reignite from your perspective a growth at a company like Zoom?
CATHIE WOOD: So Zoom's user base went from 20 million pre-COVID to 200 million, during COVID. Now a lot of those were not paying users. In fact, paying users went down from 15% of the total, to 3%. Now--
JULIE HYMAN: Because everyone was using this.
CATHIE WOOD: But think about what a great marketing opportunity, as unfortunate as it was, what a great marketing opportunity COVID was for Zoom. We all know it. We've all used it. And I don't know about you, but I am relieved when I'm going to a video call, and it's a Zoom call. Not a team's, not a Webex, not a blue jeans, because I always have trouble with those other ones.
Anyway, this is the first rip and replace cycle in the enterprise communication space, in 30 years. Cisco ignited the first one, as we were building out the backbone of the internet. That was all on-prem, very physical, hardware oriented, right? Zoom is in the cloud, as a rip and replace cycle. And is going to cut the costs of enterprise communications.
Enterprise communications is the largest part of the tech stack. $1.5 trillion revenue opportunity per year. We think that there are two companies in the prime position to take us to the cloud, when it comes to enterprise communications. Microsoft and Zoom. And it doesn't stop with you and me on a Zoom video call, and everyone else we know.
We're moving into Zoom rooms, Zoom events. We're moving into work-- Zoom getting more involved with work processes. So think of, have you heard of Airtable and Monday? So really helping to evolve work processes, as we move into the cloud, and become more efficient enterprises.
JULIE HYMAN: I know you talked about this a lot last week, at the Bitcoin conference. But I do want to ask you again about your Bitcoin million dollar call. Especially as we see Bitcoin wavering again, dipping below 40,000. Time horizon matters, as we've been talking about, when are when are things going to get to a million? How long do--
CATHIE WOOD: So that is a 2030--
JULIE HYMAN: Like the other calls that you talked about.
CATHIE WOOD: Right. It's somewhere between 2026 and 2030, is where we think that million dollars, from $40,000. I don't think people believe me when I said it, on stage last week, at Bitcoin 2022. But I meant it. And many people think, OK so you're assuming that institutional investors become huge holders of Bitcoin.
No we're not. We're assuming though that they will move in gradually, and by the time we hit a million dollars plus, they will have a 2 and 1/2 exposure to Bitcoin. Now this is such a big idea. And that is such a small allocation. I think they will regret not having more.
Because, as I mentioned, this is the first-- each word I'm about to say is really important. The first global, big idea, private, meaning not overseen by any government, digital, rules based monetary system. It is a big idea. And my mentor, Art Laffer, when he was collaborating with us on our first white paper in 2015 on Bitcoin.
He said, this is what I've been looking for! A rules based monetary policy! It might not be the right rule. But it's a step in the right direction. And of course, he means by that is a great store of value.
Because it's mathematically metered to stop it 21 million units. So that's a quantity rule. So great store of value, scarcity meaning. But not a great means of exchange, right? That would mean a flat price rule.
But we think over time, even that will-- thanks to the Lightning Network, become more of a means of exchange, and a unit of account, playing all three roles of money. And just to top this off, when Art and I and Chris Burniske, at the time our analyst, were collaborating, I remember saying, Art how big could this be? This is amazing! And he said, well, how big is the US monetary base?
And back then, it was 4 and 1/2 trillion dollars. And Bitcoin was $6 billion in market cap, today it's $800 billion. He said, well, 4 and 1/2 trillion. Today, that number is 9 trillion. So it's a very big idea.
JULIE HYMAN: We're almost out of time. But I want to ask you a little bit of a reflective question to end us. Because I think you are-- one of the hallmarks of Cathie Wood and ARK Invest in the brand is your conviction in things that you believe in. But you also talked about earlier, with regard to something like GM, keeping an open mind.
So obviously you're reflective here on your process. What's the biggest mistake that you have made, since you started the firm? Either a particular bet, a process, whatever you would pick.
CATHIE WOOD: You're talking from the investment side or running a business?
JULIE HYMAN: I would say either, or.
CATHIE WOOD: Well, the heart and soul of the business is people. And I think in the early days, and this is for people who are starting companies up, founders of companies. I think every founder makes this mistake. And I tried to limit this particular mistake, because I heard so many people talking about it. Be careful about the share of ownership that you give away to attract people.
Be very careful. Make sure there's vesting involved. I made a few mistakes, not many because I had talked to so many founders and said, if you could change anything, what would that be? And so we've been very careful with that.
We're employee owned, and have one minority owner, Nikko Asset Management, in Japan. So I think the people is always the answer to that question. You make mistakes, and then you have to move on. And make sure to cut losses as well.
JULIE HYMAN: And what about from an investment perspective?
CATHIE WOOD: The biggest mistake-- let me just explain something or elaborate on something I said earlier. During risk off periods, we cut the number of names in our portfolio, consolidate, concentrate, to our highest conviction names. Because we know there are mistakes in the portfolio. This particular strategy came out of making many mistakes in the past.
And so whenever we go into a risk off period, I say to all our analysts and to Brett Winton, our director of research, I say, OK, now is the time. We have doubts, and they're reflected in our scoring. But are they reflected strongly enough? Which names are we going to consolidate into?
And the important other side of that is which names are we going to consolidate out of? So I think doing that aggressively, we shall see. If we have concentrated towards names that really aren't truly disruptive, and we find that our research was faulty, OK then that will have been a big mistake.
And in terms of the rest of our tenure, what happens when we sell stocks because we've made a mistake, we try and remember OK when we cut a score like that for management changes, let's have heightened sensitivity to the next management change. Because we should have sold the stock when there was that management change. And I know that there are names that we did sell for that reason. Or that we did not sell for that reason.
And those would have been some of the biggest mistakes. But you know I've been in the business now for 45 years. And so I've tried to bring to ARK all of the lessons learned. And I've learned a lot of lessons. I've made a lot of mistakes over time. And so I'm not saying we don't make mistakes.
I'm saying there are mistakes in the portfolio. If there aren't, then we're not taking enough risk. But during risk off periods, many people would say, well, concentrating your portfolio during a risk off period, that's risky! And we're saying, no, it's not. We're basically telling you, we think we're not right in roughly 22 stocks, that our confidence isn't high enough.
We're willing to let it go. And we do, like all of our stocks in the portfolio at any given time. But it is during the risk off moments, that we are very truthful to one another. And say, yeah, this could become a problem. And I probably haven't cut my scoring enough to reflect it.
JULIE HYMAN: Very interesting. Great to get some insight into your process. And what you guys do. Kathy, thank you so much for doing this. Really appreciate it.
CATHIE WOOD: Thank you so much, Julie.
JULIE HYMAN: Thank you. OK.