This blog is based on the conversation our investment team held during our weekly Clubhouse Beer Bash, where we dissected the asset management firm ARK (mostly ARKK’s technology portfolio and positions). We shared our thoughts on the underlying investment thesis for ARK’s top-position holdings, combined with our views on the early stage opportunities. There will be two parts of the article and we will give our thoughts on three top holdings of ARKK in each part. All our opinions for these public companies are provided for informational purposes only, and should not be relied upon as legal, business, investment or tax advice.
Innovation and technology disruption have been the hidden drivers behind every strong growth engine. In recent years, an acute sense for boldly innovative companies has no longer been limited to private investors anymore. Public investors' mindsets have also evolved from benchmarking and passive strategies to seeking future innovations capable of reshaping the landscape and fueling growth for next-gen mogul companies.
ETFs under ARK have been one of the publicly traded technology-oriented ETFs that caught the eyes of a lot of investors in 2020 due to its astonishing performance and its tech-oriented positions. As an early stage investor, we’ve noticed a growing trend of public intermingling and the private market as the public market’s performance has been rippling down to the decision, thesis, and valuation in the private company investment world. On the other side, a growing buy-in and well-educated, tech-oriented mentality has inversely penetrated the public investors’ portfolio strategy.
Let’s start with some background information for the ARK Invest.
ARK was founded by Cathie Wood in 2014 with an operating history of six years, and unlike a lot of traditional ETF or traditional public market investors, the strategy of ARK is focused on disruptive innovation. The flagship fund, ARKK ETF has $28B in size today, but from 2014 to 2017 its performance was on par with the S&P 500 and even underperformed. However, from 2017 to 2021, ARKK drastically out-performed the S&P 500 with jaw-dropping returns. Today, with six ETFs, ARK now has AUM exceeding $60B, compared to $3.6B one year ago. Besides Tesla, we will share six portfolios in the ARK that take up 20% holdings but have created 80% of returns, and how its evolved fundamentals can be relevant to early stage opportunities.
The infrastructure behind each industry has been so siloed in the past 10 years that it needs some digitized solutions to rebuild most of its legacy parts. We believe the backbone of each industry and each vertical will ultimately be rebuilt. We’ve been looking for infrastructures that handle the dirtiest work and engineer the most heavy lifting as an entry point from cloud infrastructure providers to APIs and SDKs offerings.
Shopify started by offering subscription-based infrastructure for E-commerce, and targeted small to midsize businesses for conducting their online business. Their major revenue came from combined subscription solutions and merchants solutions. The underlying strength of Shopify’s business model lies in the consistent revenue growth coming from each customer cohort without too much requirement for retention. The math here is that revenue comes from remaining merchants growing within a cohort, offsetting the decrease in revenue from merchants canceling the service. By heavy lifting merchants’ multi-channel front face, integrated backend, and aggregated data, Shopify has gone far beyond the infrastructure powerhouse and moved faster into the deep merchant value-add spaces including logistics, inventory, fulfillment, shipping, payment and ultimate platform plus marketplace that would directly compete with Amazon. All around, Shopify seems to have had deeper connections with these merchants from day one, the stickiness and high switching costs the whole infrastructure Shopify has built for them have become a strong defensible moat for the business.
On the other side, the marketplace middleman may be eliminated from the consumer game in the near future as D2C takes off on every platform, and merchants are looking into more liquid options. And that’s why we’re seeing lots of ventures tapping into the roll-up business of FBA’s (Fulfillment by Amazon) top sellers in order to reach the scalability those single cash-cow sellers can’t reach. By buying a lot of existing sellers’ cash flow and FBA assets, these ventures consolidate them into an independent, well-branded and marketable box with more scalable supply chains, higher bargaining power with manufacturers, more reliable fulfillment service, and stronger brand awareness. The imagination for e-commerce and the infrastructure behind it will be unstoppable and transform everything--especially when considering Jeff Bezos’ claim that Amazon is only taking 1% of the global E-commerce market compared to Shopify’s worldwide footprint (the North American market accounts only 56% of its 1.7M merchant base, and there are 12M-24M merchants worldwide with an aggressive growth rate).
As the earliest institutional investor for Zoom 10 years ago, we saw it as an app that would rewrite the cloud video conferencing experience for users. The market of synchronized video communication was big enough to address a strong new entrant. Today, seeing Zoom as one of the most successful video conferencing apps would only be seeing one star in the solar system--what really matters to this empire is becoming an all-around platform with several asteroids in its orbit, and every addition would serve the growth of Zoom’s core offerings. Platform economy has also been a very important angle. Early stage companies expand into adjacent areas by building a platform derived from its core products. For example, Snowflake started as a data warehouse, and it will ultimately become a data cloud. The data cloud Snowflake sits on will inversely empower all the applications’ development with its rich data.
Travel restrictions have put a huge damper on university life in the United States. Educators are expanding into online education, and a growing number of people now earn their credentials virtually. With education and earning credentials changing format, the US and the world’s top universities will be opening up enrollment to global students via Zoom. Zoom’s collaboration with academia will not be limited to virtual online class, but the whole academic enterprise can be built on Zoom’s engine. Tapping into education would open up a whole new world for Zoom’s platform. Students from all over the world will be sitting in Zoom's hybrid AR class as Zoom is also creating a more frictionless Zoom University to onboard, engage, deliver content, and help students get their degrees online.
The world is moving into remote or hybrid work, and every manager wants their employees to remain as productive as they would be in the office. Employees also don’t want to be stuck in meeting after meeting without quantifiable results from each virtual meeting. Productivity tools, asynchronous communication, team offline collaboration tools, and project management tools would be the most adjacent market for Zoom to tap into. Zoom will not only serve as the tool for people to conduct a meeting, but an all-in-one centralized place. Users will be able to deliver information with ease to prepare for meetings. They can alternate between different apps within Zoom in the meeting. They can capture key information from the meeting with products like Avoma (one of our portfolios), an AI transcription and natural language processing technology. With the newly developed Zoom Apps, Zoom will be able to become the next-gen collaboration platform that transforms people’s workflow and productivity. Slack and Zoom have a large percentage of overlapping users. Slack’s value is a fifth of Zoom’s market cap now, and if Zoom is capable of consolidating and eventually snapping up the collaboration, how much more revenue multiple will the market be willing to give to this new empire?
On-Zoom has been a savvy move by Zoom that not only serves the needs of online event browsers, but creates a whole new world of embedded applications (payment, user management, and even customer relationship management). The immersive experience can empower all walks of creators and their activities with Zoom. Yoga teachers, chefs, florists, influencers, and anyone who wants to create and share their content will be able to use Zoom’s platform to monetize their online video-based business. Tens of thousands of yoga teachers are migrating from traditional Yoga studios to their own online classes with the clients gained from their in-person classes. People can register an online class through Zoom, attend the class online, and pay online using Zoom’s embedded payment processor. With the popularization of online classes, every enterprise has been working on becoming a payment facilitator themselves. By becoming a PaaS for creators or even e-commerce platforms in the future, Zoom would be able to convert these marginal users from its core video offering into their loyal users as well as extend the LTV of these users.
Welcome to the API-first world. API (application programming interface) is a computing interface that defines interactions between multiple softwares. In other words, it is a standardized language format in which different systems/softwares can interact with each other. Based on that common language, the connected APIs network would enable a set of new business models operating on the secure exchange of data. It would also give access to extra functionality. What we’re seeing today is the API-enabled democratization of different industries. Entrenched financial institutions are exploring open banking platforms that unbox payment, card issuance, checkings/savings accounts to credit, lending, and investing--such as Hydrogen and Moove. Legacy insurance providers are being questioned as new entrants such as Angle Health, one of our portfolio companies that provides next-gen new digital health insurance. It’s built entirely on the centralized API stack, enabling interoperability and seamless data transfer from all relevant players in the healthcare ecosystem. This contrasts the traditional carriers that leverage EDI integrations (Electronic Data Interchange--a decades old form of data transfer). Though it started as an enabler to cross the chasm for disconnected systems, defining and becoming a standardized product by themselves, ultimately it seeks to empower the whole system by acquiring different capabilities to become more competitive. The API economy is just getting started.
Twilio began as a cloud communication platform, starting by taking on the most hard-core problems of human communication for businesses. The platform provided an array of programmable applications, from programmable voice, programmable message to programmable contact centers (Twilio Flex). The API-based contact centers doesn’t offer a full-stack contact service, but instead offers a granular API-first contact center building blocks for businesses of all sizes to customize their customer communication service that fits. But that’s not the case anymore--Twilio isn’t just taking steps to become the next API-first Salesforce. They’re aiming to become something even more tremendous and value-recurring than Salesforce. After Twilio planted its API in most business’ customer communication engines for years, we’re finally getting to see the fundamentals of API business evolve and prepare to transform the whole scene. Twilio’s channel APIs have been playing the role of omni-channel enablers and connectors. Twilio flex is an aggregation of all that seating on top of Twilio’s all channel APIs. If this is the whole equation, the elasticity of API business won’t stress any of these incumbents with a couple hundred market cap, as Twilio is not handling any of these customer engagement data. And unlike Salesforce’s service cloud, Twilio started with the infrastructure, not the full-stack product cloud. But from the acquisition of Segment, what Twilio is heading towards is a full-stack engagement cloud, not Oracle’s engagement cloud but the entire cloud CRM service provided by Salesforce.
Twilio has emphasized several times in their investors call that they’re only the Lego pieces linking their customer’s service center with the micro-service they provide. While this acquisition leaves more room for investors’ ongoing imagination, Wall Street did reward Twilio with its ambition. It is true that API streamline and connect the silo source whole APIs are simply a gateway, truly innovative back ends to effect real transformation. Such internal streamlining and the platform formation efforts may be the next battleground for competing digital services. Some day in the near future when that lego is no longer a lego, the whole web glued together by Twilio’s infrastructure will start to cannibalize the kingdom of Salesforce and become a better version of it.
In Part 2, we will talk more about how we see opportunities in Bitcoin, younger generation's social investing behavior by digging deeper into CashApp, and incremental changes in healthcare. Follow us on Linkedin to get the earliest access to Part2.
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