September mARKet Update Webinar Summary

In our September Market Update webinar, ARK Invest’s CEO and CIO, Cathie Wood, joined ARK’s investment team to offer crucial insights into market conditions, interest rates, innovation, and investment strategies. The discussion covered a broad range of topics, from the U.S. Federal Reserve’s (Fed’s) policy decisions to specific portfolio updates, including ARK’s views on deflation, AI, and robotics. This article summarizes our perspectives on key questions asked during the webinar and on the investment landscape as we move into the final quarter of 2024. For additional insights, we invite you to view the full mARKet Update Webinar here.

Economic Outlook: Interest Rates, Inflation, and Deflation

For some time, ARK’s research has suggested that inflation is declining and is likely to give way to deflation bolstered by disruptive innovation. As the economy weakens, the Fed should begin easing interest rates faster than many anticipate. Deflationary forces, particularly those driven by innovation in sectors like AI, robotics, and energy storage, differ from those in play during the 2008-2009 financial crisis. Technologically enabled deflation tends to drive boom cycles in unit growth that present unique investment opportunities. We believe that innovation will thrive in this environment over the coming business cycle.

Innovation and ARK’s Long-Duration Strategies

During ARK’s Market Update Webinar, an audience member wondered about ARK’s long-duration strategies, especially as the bond market has begun pointing toward lower interest rates. While long-duration assets have faced headwinds in 2024, we believe the coming interest rate cuts will renew investors’ appetite for risk, particularly risk associated with innovation-based strategies. Our conviction remains strong. The current market is an opportunity to invest in the most promising companies positioned to thrive in a deflationary environment, as detailed above.

Strategic Exits from Teladoc, Ginkgo, and Zoom: AI and Execution

Cathie Wood and ARK’s investment team also addressed questions about ARK's recent exits from Teladoc Health, Ginkgo Bioworks, and Zoom Video Communications—companies at the intersection of technology and disruptive innovation that previously were core positions in our portfolios. Strategic considerations around critical execution risks and leadership shifts that could impact those companies’ long-term AI innovation goals prompted us to reevaluate our exposure.

Teladoc: Leadership and AI Vision Missed the Mark

Long expected to be a potential game-changer in the telemedicine space, particularly during the COVID-19 pandemic when virtual healthcare adoption surged— Teladoc Health's vast healthcare data trove seemed to position the company as a leader in AI-driven digital health. The data Teladoc collects from patients, physicians, hospitals, and insurance companies remains an invaluable asset in the burgeoning world of AI-enabled healthcare.

Notwithstanding that early advantage, we became increasingly concerned about Teladoc’s leadership transitions, which over time appeared to shift the company's strategic direction away from the possibility of meeting our expectations of aggressive AI integration. In June 2024, Teladoc's hiring of new leadership from Guidewell, a non-profit with limited experience in AI and advanced data analytics, raised significant concerns, signaled a potential slowdown in Teladoc’s ability to execute on its AI ambitions.

Management turnover and lack of meaningful progress on the AI front led us to exit our exposure to Teladoc. While we continue to believe that AI will revolutionize healthcare, we see stronger AI opportunities out there, especially in the liquid biopsy space.

Ginkgo Bioworks: Execution and Scale Challenges

Our exit from Ginkgo Bioworks is another fascinating case in which the promise of innovation collided with the reality of operational challenges. A leader in synthetic biology, Ginkgo set out to revolutionize biological programming, applying AI and automation to create custom organisms for a wide range of industries. Initially, we believed that Ginkgo’s vision for the future of programmable biology would lead to significant growth as it scaled its automation and AI capabilities.

While Ginkgo was in the right space at the right time, the company faced challenges executing on its ambitious vision. Ginkgo has struggled to automate across its platform in the manner that we believe is required for scaling its operations effectively. Achieving Level 4 automation—a key milestone for faster, more efficient execution of its synthetic biology programs—appears beyond Ginkgo’s reach at this time. The company’s slower-than-expected progress in that area diminished our confidence in its ability to maintain a competitive edge in the fast-moving AI and synthetic biology space.

Moreover, while Ginkgo continues to generate valuable data, its AI-driven analysis of that data has lagged behind our expectations. The company’s AI strategy, which we saw as crucial to its growth, has not been implemented as swiftly or effectively as we had anticipated. As a result, we exited our position and reallocated capital to companies that our research suggests are executing more effectively in synthetic biology and AI integration.

Zoom: Intense Competition and AI Monetization Challenges

A poster child of the COVID-19 pandemic, Zoom became a household name for virtual communication and grew its user base from 20 million to 200 million virtually overnight. Its rapid adoption and Zoom CEO Eric Yuan’s strong focus on AI drove our initial enthusiasm for Zoom’s agility and innovation in AI. At the time, we believed the company could sustain growth after the pandemic, particularly in enterprise applications like Zoom IQ for Sales, contact centers, and Zoom Docs.

Competition in the video conferencing space, particularly from Microsoft Teams, intensified far more quickly than we anticipated. Microsoft’s ability to bundle Teams with other software solutions posed a formidable challenge, especially related to small and medium business (SMB) customers. Despite Zoom’s efforts to innovate through AI-driven features like meeting summaries and email drafting, the company has struggled to monetize those features at the rate we expected. Today, Microsoft is charging $30 per month for AI-enhanced Microsoft Teams features while Zoom is giving away similar functionality for free.

Unhelpful to that predicament, some of Zoom’s most promising products, such as Zoom IQ for Sales, failed to generate the market demand we anticipated. While contact centers' results are promising, we believe this product will take several years before it becomes a meaningful driver to overall revenue. Zoom’s slower-than-expected ramp-up of AI-driven products in the face of fierce competition compelled us to exit our exposure to Zoom across all of ARK’s funds. That said, we continue to believe that Eric Yuan is a fighter and not afraid of taking on a big challenge. We will continue to pay careful attention to Zoom. For more on ARK’s perspectives on Zoom, please watch the full webinar.

In spite of our waning conviction in the particular companies noted above, we emphasize our conviction in AI as a transformative force in all three associated industries—healthcare, synthetic biology, and communications. In each case, our decision to exit the position reflects our portfolio focus, consolidating into opportunities that we believe have substantial exposure to AI with less business and execution risk.

The Future of Robotics and AI

ARK’s September Market Update webinar also touched on our research on the future of robotics and AI. Highlighted by Tesla's Optimus project, we believe humanoid robots represent a massive economic opportunity. The generalizable robotics industry with use cases in both household and manufacturing could become a $24 trillion revenue opportunity.¹ As automation and AI adoption accelerate, we are positioning our portfolios to capture value from those trends: Tesla, Teradyne, and Amazon are leading the charge.

Economic Recession and Investment Strategy

Historically, a correction in the yield curve has indicated a recession within the next six months. In contrast, our research indicates that we are already in the tail end of a rolling recession that began when the Fed first began raising rates. If we are right, the eventual easing of interest rates should shift market sentiment toward high-growth companies, as innovation-based strategies historically perform well in such periods of transition. As in past recessions, we expect companies with superior, innovation-driven revenue growth to lead the next phase of market leadership.

AMD vs. NVIDIA: AI Accelerators and Market Share

Another key topic of discussion during ARK’s September Market Update was the ongoing competition between AMD and NVIDIA. While NVIDIA dominates the GPU market for AI accelerators, AMD is rapidly gaining ground, especially with its MI300 accelerator. Our research suggests that AMD's technical advancements and partnerships with major players like Microsoft position it well to expand its market share, its progress central to reducing AI hardware customers’ dependency on a sole supplier for solutions and fostering healthy competition in the space.

AI's Disruptive Potential Across Industries

Finally, ARK’s September Market Update webinar discussed Palantir’s role in the evolution of AI. Our research identifies Palantir as the leader in data integration and application building so critical to operationalizing AI within organizations. Palantir platforms like Foundry enable the transformation of data-based insights into actionable workflows across industries, including insurance, healthcare, manufacturing, and numerous others. We are particularly excited about Palantir’s potential to scale AI solutions across a wide range of industries and public sectors in ways that amplify the disruptive potential of AI.

Conclusion

As ARK continues to navigate a volatile market, we are laser-focused on identifying and investing in the most innovative and disruptive technologies. Their deflationary impact, coupled with easing interest rates, offers a compelling backdrop for long-duration strategies. We are confident that our portfolios are well-positioned to ensure long-term value for our investors by capitalizing on the transformative changes in the economy and technology landscape.

Stay tuned to our In The Know video series for deeper insights about deflation, innovation, and macroeconomic developments.

Important Information

The information provided in this material is for informational purposes only and should not be used as the basis for any investment decision and is subject to change without notice. It does not constitute, either explicitly or implicitly, any provision of services or products by ARK, and investors should determine for themselves whether a particular investment management service is suitable for their investment needs. All statements made regarding companies or securities are strictly beliefs and points of view held by ARK and are not endorsements by ARK of any company or security or recommendations by ARK to buy, sell or hold any security. Historical results are not indications of future results. 

Certain of the statements contained in this material may be statements of future expectations and other forward-looking statements that are based on ARK's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. ARK assumes no obligation to update any forward-looking information. ARK and its clients as well as its related persons may (but do not necessarily) have financial interests in securities or issuers that are discussed. Certain information was obtained from sources that ARK believes to be reliable; however, ARK does not guarantee the accuracy or completeness of any information obtained from any third party.