ARK Disrupt Issue 132: Chips, Fintech, Batteries, MaaS, & Drug Trials

Please enjoy ARK Disrupt Issue 132. 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. Intel’s Manufacturing Is Frozen in Time  

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ARK Disrupt Issue 132

If you look at Intel’sINTC financials, you wouldn’t have a clue that anything has gone wrong: it hit record revenues of $63 billion and grew profits 27% in 2017. Yet, under the hood Intel’s engine has stalled, as shown above.

For decades, Intel has shrunk the size of its transistors every two years, in sync with Moore’s Law. In 2014, progress abruptly stopped and today it is manufacturing the majority of its chips at 14nm, a process more than four years old.

In semiconductors, while a six-month delay may be understandable, a four-year delay is a disaster. Two of Intel’s long-time competitors—TSM and AMD—are gaining significant competitive ground for the first time in decades. AMDAMD now has an opening into Intel’s lucrative datacenter business and could capture a significant portion of next year’s server refresh cycle with 7nm chips built by TSMTSM.

2. China Modifies Regulations for Mobile Payment Platforms  

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Earlier this year the Central Bank of China issued regulations for the financial services industry that it appended last week for mobile payment platforms. The appended regulations include the following:

  • New ceilings on mobile payments per transaction: Based on customer credit profiles, each transaction is limited to 500 yuan ($77), 1000 yuan ($154), or 5,000 yuan ($769).
  • A significant boost in reserves held at the People’s Bank of China (PBOC): The reserves held at the PBOC against outstanding payments platform balances will jump dramatically from 20% to 100% this week.

Following the news, investors in TencentTCEHY and Alibaba’sBABA ANT Financial were concerned about their loss of interest income from the float, roughly 7.5 billion yuan, or, in Tencent’s case, 2.5% of profits. While not inconsequential, the interest income these platforms derive is dwarfed by the value they create in lowering the cost of customer acquisition for their advertisers and other service providers. Indeed, by eliminating interest income from the payments platform model, the PBOC will deter marginal players from entering the market, which actually will play to the benefit of both Tencent and Alibaba.

The PBOC seems to be taking aim at capital flows into the shadow banking system. While they could slow economic growth in the short term, these regulations should weed nefarious agents from the financial services industry, adding to confidence and stability in the banking system.

3. PG&E Proposes to Replace Natural Gas Plants with the World’s Largest Battery Deployment 

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After deploying the world’s largest battery (100 MW/129 MWh) in Australia last year, TeslaTSLA recently released details of an energy storage project ten times that size. PG&E is proposing four energy storage projects, one of them a Tesla 182.5 MW/730 MWh battery with the option to expand up to 1.1 GWh. Batteries could change the structure of the utility industry, as the California Public Utilities Commission’s analysis concluded that buying new batteries would be a better deal for ratepayers than maintaining the existing, economically challenged gas plants.

ARK’s research illustrates that batteries are cost competitive with natural gas peaker plants for newly added capacity at current prices. Moreover, as their costs continue to decline during the next four to five years, batteries will become more competitive with current capacity that is activated less than 25% of the time. In the U.S. alone, this opportunity could generate $83 billion in revenue per year.

ARK will be monitoring these projects closely as case studies for “ripping and replacing” existing capacity with new energy storage.

4. China’s Leading Autonomous Platform Extends into Japan 

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BaiduBIDU and King Long produced the 100th autonomous electric “Apolong” bus this week in China, and forged a partnership with SB Drive, a JV between Softbank and Yahoo Japan, to roll out an autonomous bus service in Japan for 2019. Baidu first plans to start a domestic Apolong service before expanding internationally, so perhaps Apolong buses will be seen in Chinese cities later this year or next. With no driver in the front seat, Apolong buses initially will service tourist areas, parks, and industrial campuses.

Apolong vehicles will be based on Baidu’s Apollo autonomous driving platform. Baidu is calling this a “level 4” system. While the various levels of autonomy are often misunderstood, level 4 means autonomous driving with no driver behind the wheel, but it does not perform in all environments or weather conditions. In other words, Baidu’s buses will be travelling on fixed routes in constrained environments, a little behind the state of the art autonomous taxi service that Waymo plans to offer in Phoenix this year. The Chinese government has designated Baidu’s Apollo as the autonomous driving platform in China, which ARK estimates will be the largest market for mobility-as-a-service (MaaS).

Partnering with SoftbankSFTBF seems to be a smart strategy for Baidu to expand Apollo internationally. Japan is a good start, but Softbank has ownership positions in many ridesharing services, especially in Asia, including Didi in China.

Baidu also partnered with Intel’s Mobileye to incorporate two of its products into Apollo autonomous platform: its Responsibility Sensitive Safe (RSS) model, a “formal model for the safety assurance of Automated Vehicle (AV) decision making,”and its Surround Computer Vision Kit. Baidu could become an extremely important partner, potentially garnering a significant portion of the economics if Apollo helps Intel to scale Mobileye’s system throughout China. Notably, Mobileye’s mapping solution does not seem to be included in the partnership, perhaps because Baidu plans to dominate autonomous mapping, one of the most valuable components of the autonomous ecosystem.

5. Alzheimer’s Patients Find Some Hope in Trial Results

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On Friday, BiogenBIIB and its collaborator, Eisai Lilly, announced topline results for their Phase 2 drug candidate, BAN-2401, which addresses early onset Alzheimer’s disease.

After 18 months of use, BAN-2401 demonstrated a dose-dependent response that reduced the accumulation of beta-amyloid plaques in the brain and slowed cognitive decline. Beta amyloids have been a controversial target in the treatment of Alzheimer’s. This study linked the reduction of beta amyloids to improved cognition.

Perhaps more important, Biogen’s Phase 3 Alzheimer’s drug candidate, Adacanumab, targets beta-amyloids. Results from the Ban-2401 study validate one of Biogen’s later stage assets which could address a massive unmet need.

ARK estimates that drugs which improve the quality of life for Alzheimer’s patients could generate global revenues averaging $170 billion dollars per year.

The information provided is for informational purposes only. It does not constitute any form of advice or recommendation to buy or sell any securities mentioned. It is intended only to provide observations and views of the author(s) at the time of writing, both of which are subject to change at any time without prior notice. Certain of the statements contained herein are 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. Past performance is no guarantee of future results. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. 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.