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With political strife and worries about global warming, economic growth and debt, it’s easy to lose sight of the fact that the human race isn’t doomed just yet.
We know this because of the enormous amount of technical innovation happening everywhere — making life easier and more fun. This reminds us the world is still full of brain power, raw entrepreneurial spirit and, what the heck, I’ll say it, “positive vibes.”
“We are seeing more innovation now than we have ever seen,” says Catherine Wood, the CEO and chief investment officer of ARK Invest. ARK runs several exchange traded funds (ETFs) that invest in disruptive innovation. There can be good money in this.
The firm’s ARK Innovation ARKK, -1.19% and ARK Web x.0 ARKW, +0.04% ETFs are up more than 140% over the past three years, compared with about 66% for the Nasdaq COMP, -0.81% and 39% for the S&P 500 SPX, +0.10% Its Industrial Innovation ETF ARKQ, -0.13% is up around 76% over the same time span.
Before you turn irrationally exuberant on ARK ETFs and load up on them, it’s worth pointing out that not all of its funds are winners. The 3D Printing ETF PRNT, +1.41% has lagged behind the Nasdaq considerably since its July 2016 launch. It is only up around 15%.
And just because the winning ETFs have done well, this does not mean they will continue to do so. They’ve also been stinkers for long time spans. In their early days, the ARK Innovation and ARK Web x.0 ETFs suffered a multi-year stretch of underperformance compared to the Nasdaq and even the S&P 500. If it happened before, there’s no reason to think that can’t happen again. Consistent stock picking, after all, is not easy.
Still, Ark Invest has obviously been doing something right, at least lately. So it’s worth considering the firm’s favorite names in disruptive innovation. Below are five companies that look like good plays on four mega-trends. These companies were singled out by ARK in its latest webinar, and they rank among the top holdings of several of its ETFs.
Electric vehicles: Tesla
What was once just a cool car company founded by a quirky but innovative thinker has turned into one of the nastiest bull-bear battlegrounds I’ve ever seen. This one is worse than “Game of Thrones.”
Bears who are short the stock point to problems like slowing sales, dwindling cash and the arrival of major car companies like Ford F, +1.26% General Motors GM, -2.65% and BMW BMWYY, +0.44% in the electric-vehicle (EV) space. Bears also cite high management turnover and the erratic behavior of Tesla TSLA, -1.15% founder Elon Musk as big negatives that spell doom. They even take the low road by accusing him of drug addiction despite having no evidence for this.
Bulls say Tesla is a step ahead of everyone in the EV space, and that customers simply love its cars. Tesla’s Model 3 was once again the top-selling luxury vehicle in the first quarter. Bulls also note that Tesla has amazingly strong brand power, and that incumbent car companies have a history of failure when challenging upstarts.
After all, remember how Toyota TM, -0.17% crushed the U.S. car companies on their home turf in the 1970s and 1980s? Unlike incumbents, disrupters like Tesla start with a clean slate. Tesla designed its own high-tech car factory that it claims is better at making EVs. It’s in the process of rolling out a clone in China. Because Tesla is so far ahead, “some of the traditional car makers might not survive,” says Wood, at ARK. Tesla might also be a play on ride sharing. It hopes to have 1 million autonomous-driving “robo taxis” on the road in 2020.
The bears were emboldened by first-quarter results, which saw Tesla missing big on earnings and sales. But Tesla says it can make up the shortfall, and so it reaffirmed guidance for the year. As for cash, it reported has a hefty $2.2 billion, even after covering a large $920 million debt payment.
Regardless of whether Tesla is on the road to ruin, you have to give it credit for being an innovator that pushed the world into electric vehicles. Tesla was recently a top holding of the ARK Innovation ETF, and the second-largest holding of the ARK Web x.0 and ARK Industrial Innovation ETFs.
The hidden risk: The dirty little secret of electric cars is that they are big contributors to global warming, if you believe that carbon is the culprit. EVs ultimately run on power generated by burning natural gas (NG). NG is a big source of fossil-fuel pollution because so much methane escapes in production. Electric vehicles are far from “carbon friendly.” If the public ever figures this out, the chief selling point for electric vehicles will be out the window.
Read: Here’s how to rationally value Tesla’s stock
Artificial intelligence: Nvidia
Artificial intelligence (AI) seems more like hype than reality. Businesses love to claim to be a play on AI themes like “machine learning” and “big data analytics” since these are buzzwords that attract attention — and funding. But AI is real, and it’s going to power everything from self-driving cars to cancer-diagnosis tools — and who knows what else — sooner or later.
Since we don’t know the ultimate applications and who will profit from them, this is a place where it makes sense to go with the “picks and shovels” companies. Here, Nvidia NVDA, +0.93% is an obvious choice, given its experience and expertise at developing sophisticated chips.
Nvidia has invested over $17 billion in research and development since it was founded, and it shows. The company invented graphics processing units (GPUs). Today, its chips are some of the best at powering deep-learning algorithms, a form of AI where software writes itself by learning from data. In December, Nvidia GPUs powered by its Tensor Core set six records in AI performance, according to standards set by tech leaders at the forefront of AI such as Alphabet GOOG, -7.70% GOOGL, -7.50% Intel INTC, -0.14% and Baidu BIDU, +0.23%
Nvidia estimates that its high-performance computing data center market will grow to $50 billion in 2023 from $37 billion last year. “The world needs more computing. And a lot of that computing is related to machine learning, data analytics, deep learning. It’s related to the things that we’re working on,” Nvidia CEO Jensen Huang said in the company’s most recent conference call.
Nvidia shares look attractive because they are still recovering from their crypto hangover. Its chips power bitcoin-mining hardware. So when the bitcoin bubble burst, Nvidia performance suffered. But it’s still the same company with super-sophisticated chip-design capabilities. Nvidia is the top holding of the ARK Web x.0 ETF, and the third-largest holding of the ARK Innovation and ARK Industrial Innovation ETFs.
The hidden risk: Nvidia has had amazing staying power, but the reality is most tech companies have a hard time staying at the top of their game for long stretches of time.
Read: It’s time to buy tech stocks again, including Nvidia
The cloud: Nutanix
“The cloud” is one of those game-changing technology developments that comes along once a decade. It’s revolutionized the business world by giving companies access to vast server farms and the apps and storage they host. It’s made life easier for millions of people who probably don’t even know it exists — turning Jeff Bezos into the richest man in the world in the process. His Amazon.com AMZN, -0.61% offers the unstoppably popular cloud service called AWS.
The “cloud” everyone talks about, though, goes far beyond the “public” clouds offered by companies such as Amazon.com. It is actually a vast hodgepodge of smaller clouds, networks, apps, storage systems and desktop computers inside large companies.
It’s quite a jumble. So it can be confusing to navigate. Enter Nutanix NTNX, +1.24% Its software helps companies set up “hybrid clouds.” This means they pick and choose what apps and services they want to run on various clouds and how to best serve them up. Nutanix calls this hyper convergence.
If you missed the triple in this stock from the summer of 2017 to the summer of 2018, you are in luck. Nutanix stock fell hard in February when guidance came up light. But this is still the same company, and the same big-picture trends are still in place. Nutanix is a holding of the ARK Web x.0 ETF.
The hidden risk: The technology grave yard is full of upstart innovators trounced by larger competitors that copy-cat the success. Dell Technologies DELL, +2.84% Hewlett Packard Enterprise HPE, +0.64% and Microsoft MSFT, +0.64% are working on this right now.
3D printing: Stratasys and Materialise
3D printers aren’t as ubiquitous as some predicted. But deep inside companies, 3D printers are already widely used to make specialized parts and design prototypes in sectors ranging from auto makers and aerospace, to defense and footwear.
Despite this, ARK Invest’s 3D Printing ETF has been a bad performer. ARK still loves the space, though. “Our confidence in 3D printing has not diminished,” says CIO Wood. She thinks uptake will be particularly strong in aerospace and medical devices. “We think this is a coiled spring.”
One favorite play here is Stratasys SSYS, +0.13% Its 3D printers, materials and software are used by Team Penske and Andretti Autosport in auto racing, and the British car maker McLaren Automotive. It also has a strong foothold in aerospace, health care and consumer products. Another favorite is Materialise MTLS, -0.24% which provides 3D printing software and services, with strengths in health care where it prints medical devices, implants and patient-specific surgical guides.
Both companies are overweight positions in the 3D Printing ETF. They’re also in the ARK Innovation and ARK Industrial Innovation ETFs.
The hidden risk: 3D printing remains a niche market without much growth.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested TSLA, F, GM, GOOGL and NVDA in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School in the Knight-Bagehot program.
