Please enjoy ARK Disrupt Issue 127. This blog series is based on ARK Brainstorming, a weekly discussion between our CEO, Director of Research, thematic analysts, ARK’s theme developers, thought leaders, and investors. It is designed to present you with the most recent innovation takeaways and to keep you engaged in an ongoing discussion on investing in disruptive innovation. To read the previous issue, click here.
1. Highlights from Mary Meeker’s 2018 Internet Trends Report
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Kleiner Perkins’ annual internet trends report is out and as usual Mary Meeker and her team offer plenty of interesting insights. Here are a few stats that stood out to us:
- Global internet penetration will cross 50% in 2018.
- Smartphone growth has stalled. We do not believe that the smartphone market is saturated, but we do think that another killer app will be necessary for growth to reaccelerate in future years.
- In the US, AmazonAMZN Echo’s installed base jumped more than 50% in three months, from 20 million in the third quarter to more than 30 million in the fourth quarter of 2017. The Echo has penetrated almost a quarter of US households.
- The click-through rate of Facebook’sFB e-commerce ads has tripled from 1% to 3% in the past two years. Compared to the lower than 0.1% of typical web banner ads, Facebook’s click-through rate is remarkable.
- The top three investment priorities for IT managers this year are: networking, AI, and hyper-converged infrastructure (including servers that combine computing and storage).
- As measured by market capitalization, 11 of the top 20 global internet stocks are American and 9, Chinese. No other country made the list.
- Consumer and enterprise software are converging: Dropbox is a consumer product with enterprise appeal, Slack an enterprise product with consumer grade user experience.
2. Decoding Attacks on Cryptoassets
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A handful of cryptoassets has been attacked successfully over the past month. Hackers have exploited Verge, a small privacy-focused coin, twice, both times accelerating coin issuance and stealing coins worth millions of dollars. Ironically, Verge had introduced complexity into its protocol to address perceived weaknesses in Bitcoin’s security and decentralization model, but the hackers were able to exploit the new security features, forcing Verge’s team to attempt a patch. Complex systems fail in complex ways, and Verge is a classic example of added complexity increasing the potential for attacks.
While the Verge hack illustrates the hidden cost of complexity, other attackers have focused on blockchain assets that are sub-scale. A well-known hack against cryptoassets is a 51% attack, in which a nefarious actor dominates the network’s mining power and, effectively, spends the same coins twice. Because of its scale, Bitcoin’s blockchain enjoys some measure of protection against this risk, as an attack would require billions of dollars in mining equipment and, if successful, would push the value of both the currency and the mining equipment into a downward spiral. Smaller cryptocurrencies using the same mining algorithms do not enjoy the same measure of protection. An attacker can target smaller networks without putting the value of their mining equipment at risk. Bitcoin Gold, a currency that forked from bitcoin and now is worth almost $800 million, seems to have suffered this fate, experiencing several 51% attacks during the past week.
Unsurprisingly, these attacks are increasing in frequency. Suffering from choppy price action and questions about the underlying value of cryptoassets, attackers seem to be looking for returns on capital in the absence of asset price appreciation. While the networks under attack haven’t paid much of a price thus far, market participants are unlikely to remain tolerant if the scale and frequency of these exploits increases.
3. Revisiting the Economics of SpaceX’s Reusable Rockets
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Two years ago, we did an analysis of the economics for SpaceX’s reusable rockets. As shown in the chart below, we analyzed the cost of three scenarios:
- An expendable rocket
- A reusable rocket with 75% recovery rate
- A reusable rocket with parachute recovery
Our conclusion was that a reusable rocket would be cost competitive with the expendable strategy only if the goal is to land on and return from Mars. With an expendable rocket, SpaceX could drive down the cost curve faster by producing more rockets in a given amount of time than would be the case with a reusable strategy. While parachute recovery also would be more cost competitive than the reusable strategy, especially because it would not require additional fuel for landing, it has yet to be successful in practice.
Since 2016, SpaceX has exceeded its own recovery rate expectations, losing only one first stage in the last 24 attempts, as shown below. That first stage was the center part of the Falcon Heavy.
Thanks to improved recovery rates, SpaceX seems to have made the correct decision strategically. As shown below, reusable rocket costs are now roughly 15-20% lower than the theoretical expendable launch strategy.
As is typical with new technologies, these costs should continue to fall. SpaceX is attempting to recover the payload fairing, the protective nose cone that surrounds a payload, which Musk has estimated costs $6 million. Recently, SpaceX launched the newest generation Falcon 9, the refurbishment costs of which should be lower than for past generations, according to Elon Musk.
4. Softbank’s $2 Billion Investment in Cruise Automation and Why Autonomous Taxis Could Debut Sooner Than Expected
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This week SoftbankSFTBY agreed to invest in Cruise Automation, an autonomous driving startup that GMGM acquired in 2016 for $1 billion. Just two years later, this deal values Cruise at $11.5 billion.
Softbank’s investment provides Cruise with more capital to hire talent, improve its technology, and expand into other markets along with Uber, Ola, and Grab in which Softbank has invested. It also gives GM the ability to preserve its dividend while committing another $1.1 billion to its autonomous strategy.
Importantly, as Cruise has focused its autonomous driving strategy on robotics, Softbank’s investments in robotics could prove helpful. Alternatively, given its Vision Fund’s access to capital, Softbank could ramp up on deep learning to complement its robotics platform in the race to an autonomous taxi platform that ARK estimates should be valued at $2 trillion today.
In other autonomous news this week, WaymoGOOG agreed to purchase up to an additional 62,000 cars from Fiat ChryslerFCAU . Combined with its agreement to buy up to 20,000 cars from Jaguar and its current fleet of 600 vehicles, Waymo would be able to serve half of Phoenix’s travel needs1 within the next four years. With this fleet alone, Waymo also could accommodate roughly 0.3% of North American urban vehicle miles traveled.
ARK has forecasted that all autonomous driving services could reach 0.3% of North American urban miles traveled by 2021. If it executes, Waymo alone could keep this estimate on track. If GM and TeslaTSLA execute as well, they could exceed our early estimates by a landslide, potentially enabling autonomous taxi platforms at rates that ARK’s models had not projected until 2025!
ARK's statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. For a list of all purchases and sales made by ARK for client accounts during the past year that could be considered by the SEC as recommendations, click here. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. For full disclosures, click here.