POST WRITTEN BY
Cathie Wood
Wood founded ARK Invest in 2014. Before ARK she spent 12 years at AllianceBernstein, 18 at Jennison Associates.
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- In my view, few mature companies will be immune from the impact of disruptive innovation during the next five to ten years, thanks both to an acceleration in the rate of change and to the deflationary impact on every sector of automation (including 3D printing), artificial intelligence and the next generation internet.
- I believe that the best time to start a business is during tough times, forcing people and industries to rethink traditional processes and procedures.
Last October, citing savings of up to 90%, GE’s technology team announced plans to eliminate 29 of its 34 private data centers, by shifting their workloads to the public cloud via Amazon Web Services. Because of this “tipping point” at GE and elsewhere, Amazon.com AMZN +0.18% reported that AWS’s revenue growth accelerated to 70% on average in 2015, setting it up to crack the $10 billion mark in 2016. Jeff Bezos, CEO of Amazon, has stated for some time that he believes AWS revenues could surpass those of its retail business, a tall order given the $100 billion that the latter delivered last year. What he had not been telegraphing, until Amazon broke Infrastructure-as-a-Service out in its income statement during the second quarter, is that AWS, with a 24% operating margin, is already nine-times more profitable than its retail business.
During unfriendly markets, the shift toward disruptive innovation typically accelerates, taking share from old-line products, services, and processes. Yet, during such market corrections, many investors gravitate back toward the established benchmarks against which most investment portfolios are measured: they sell the disruptive stocks held by ARK’s portfolios, and “lower their risk” by buying into stocks more heavily weighted in recognized benchmarks.
At the same time, they are less willing to extend their investment time horizons, focusing instead on short-term variables like quarterly earnings, current income (dividend yields) and current year valuations (price-earnings ratios). They migrate away from the game changers, which are “expensive” stocks based on PE ratios, toward more mature stocks that pay dividends and sell at a market multiple or lower.
I believe investors who are unfamiliar with evaluating companies at the forefront of disruptive innovation often misunderstand that these companies are using their growth in revenue to reinvest heavily in the near-term, seeking to capitalize on massive long-term opportunities. When the network effect is at work and the “winner will take most,” investing ahead of the competition is imperative. These stocks are “expensive” by design, often reporting little or no earnings in the short-term as a trade-off for potentially enormous revenues and exceptional profitability in the long-term.
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