2. Tesla Is Delivering…What’s Next?

During its earnings call last week, although Tesla projected that EV production would increase 31% to 1.8 million units in 2023, Elon Musk noted that a 46% increase to 2 million vehicles was possible. He also noted that recent orders have been increasing at twice the rate of production, quelling investor concerns about demand.

Elon also shared his conviction that autonomous taxi platforms could result in the largest asset value creation in history. According to ARK’s research, autonomous ride-hail could turn cars—stranded assets used less than 5% of the day—into assets generating significant recurring cash flows: each of Tesla’s autonomous ride-hail vehicles could generate ~$20,000 annually, contributing importantly to our published price target for 2026.

During the earnings call, Tesla’s management also alluded to new products, including an inference computer for applications beyond automotive. Elon suggested that some of these applications will “blow people’s minds when revealed.” Other than its robotaxi or humanoid robot, Optimus, what could these new products be? In our view, its data library and training/inference tools are positioning Tesla to build other autonomous machines that navigate the physical world, perhaps drones or last-mile delivery robots. ARK estimates that real-time delivery robots that fly and roll could generate revenue of $1 trillion in 2030.

In 2014, I founded ARK Invest for two reasons: to focus exclusively on disruptive innovation and to create a transparent research ecosystem designed to surface and share information on the convergences between and among the five major innovation platforms evolving today. Involving 14 technologies, those platforms are multiomics sequencing, robotics, energy storage, artificial intelligence, and blockchain technology.

In 2022, one of the most challenging years in market history, transparency was more important than ever as shares of innovation-focused companies suffered disproportionately. In my 45 years on Wall Street and more than 30 years in portfolio management, I have never seen markets this dislocated. Today, money supply is declining, commodity prices are deteriorating, bloated inventories are unwinding, and innovation is disrupting the traditional world order, all pointing toward lower inflation, perhaps deflation. Notwithstanding the U.S. Federal Reserve’s (Fed) rhetoric, the bond market seems to be corroborating this outlook with 10-year Treasury yields in the 3.5% range and a yield curve[1] that has not been this inverted[2] in forty years. Both metrics suggest that real growth and inflation could surprise on the low side of expectations this year.

That said, plagued by fears of entrenched inflation and higher interest rates, the wall of worry in the equity markets has scaled to enormous heights, historically a positive backdrop for equities. According to the latest BofA Fund Manager Survey, investors currently are holding high levels of cash, levels not seen since the 9/11 crisis in 2001, and are overweight in bonds for the first time since April 2009. In December, the Chicago Board Options Exchange (CBOE) equity put/call ratio[3] reached a record high, surpassing levels seen during the tech and telecom bubble and the Global Financial Crisis. In hindsight, both of those times were terrific opportunities to put funds to work in highly differentiated strategies. I believe that the current market dislocation presents an opportunity for innovation strategies to thrive when equity markets recover. Fear of the future is palpable, but crisis can create opportunities.

In the spirit of prudent portfolio management, we believe an allocation to disruptive innovation is likely to balance a comprehensive wealth portfolio. Disruptive innovation not only provides access to potential exponential growth opportunities typically absent from broad-based indices, but also offers an opportunity to hedge against the increasing risk of incumbents being disrupted.

In the next few sections, I would like to communicate examples of game-changing innovation that the equity market largely ignored in 2022. In the face of market headwinds and media criticism, these breakthroughs are corroborating our original research and boosting our confidence that ARK’s strategies are on the right side of change. Disruption can surface in surprising forms and at unexpected times. Innovation solves problems and has historically gained share during turbulent times.

Next Generation Internet

ChatGPT: Artificial Intelligence (AI) is advancing at an unprecedented rate, with ChatGPT, a version of GPT-3 optimized for conversation, signing up one million users in just five days. This uptake is particularly impressive compared to the original GPT-3, which took 24 months to reach the same level. ChatGPT already scores above the national average on the SAT, demonstrating its potential to revolutionize the way we approach knowledge work.

Connected TV: In 2022, TV advertising in the US underwent significant changes as linear ad spend declined by 2% in real terms to ~$70 billion and Connected TV (CTV) ad spend on the same terms increased by 14% to ~$21 billion.[4] [5] Pure-play CTV operator Roku’s advertising platform revenue increased 15% year-over-year in the third quarter, the latest report available, while traditional TV scatter markets plummeted 38% year-over-year in the US.[6] Despite fierce competition, last year Roku maintained its position in the CTV market as the leading smart TV vendor in the US, accounting for 32% of the market, market share equal to Android, Tizen (Samsung), and WebOS (LG) combined.[7]

Digital Wallets: Allowing users to transact on their smartphones, digital wallets are replacing cash and credit cards. They overtook cash as the top transaction method for offline commerce in 2020 and accounted for ~50% of global online commerce volume in 2021.[8] [9] During the three years from pre-COVID levels in 2019 to 2022, Square’s payment volume soared 193%, six times faster than the 30% increase in total retail spending.[10] [11]

Social Commerce: While overall e-commerce spending increased by 99% over the last three years,[12] social commerce as measured by Shopify’s gross merchandise volume grew by 312%, almost four times faster.[13] Social commerce is taking significant share from traditional ecommerce and off-line retail sales.

Blockchain Technology: Despite the recent collapse of crypto exchange FTX, underlying public blockchains like Bitcoin and Ethereum have not skipped a beat in processing transactions, highlighting that their transparent, decentralized, and auditable ledgers could be a solution to the fraud and mismanagement associated with centralized, opaque institutions. After the FTX collapse, the share of trading volume on decentralized exchanges, which allow for trading without a central intermediary, rose 37% from 8.35% to 11.44%.[14] Total crypto exchange trading volume declined 66% year-on-year from $1 trillion in 2021 to $357 billion in 2022,[15] but the fallout from Terra/Luna’s and FTX’s collapses propelled Coinbase’s share of fiat-based exchange volume (excluding Binance International) by 18 percentage points, from 22% in June to 40% in December.[16]

Autonomous Technology & Robotics

Electric Vehicles: During 2022 in the US, as auto sales dropped 8% on a year-over-year basis,[17] Tesla’s sales increased ~49%. During the past three years, Tesla’s market share of total auto sales in the US has increased ~240 basis points[18] to 3.8%.[19]

Autonomous Driving: In 2022, GM’s Cruise expanded its autonomous taxi service to most of San Francisco in the first large-scale rollout in a major US city before launching in both Phoenix and Austin toward the end of the year. It compressed time to commercialization from nine years in San Francisco to just 90 days in Austin. Also, Tesla expanded access to its FSD (full self-driving) beta software to all owners in North America who had requested access, reflecting Tesla’s confidence in the capability of its feature set.[20]

Autonomous Logistics: By January 4 of this year, both Amazon and Walmart had begun deliveries using drones in select US cities.[21]

3D printing: Across the top 50 medical device companies, 90% rely on 3D printing for prototyping, testing, and even printing medical devices.[22]

Space Exploration: In 2022, SpaceX nearly doubled the number of rockets it launched to 61. It reused the same rocket in as few as 21 days, a dramatic improvement over the 356 days required for its first rocket reuse.

Industrial Robots: Despite trade tensions with China and the impact of COVID-19, industrial robot sales increased ~30% in 2021,[23] highlighting that innovation can thrive during tumultuous times.

Energy Demand: Demand for crude oil may have peaked in 2019 at 100.5 million barrels per day, particularly now that electric vehicles (EVs) are taking share of total auto sales and ride-hailing companies like Uber are partnering with rental car companies like Hertz to rent EVs. Hertz says that EV maintenance costs are 50-60% lower than those for gas powered cars. According to ARK’s research, thanks to their high utilization rate compared to personal cars, autonomous electric vehicles could lower oil demand by 25-30% to 72.6 million barrels per day by 2030, as shown below.

Genomic Revolution

Base Editing: In 2022, thanks to a new form of gene editing, a young girl in the UK with leukemia went from her death bed in May to cancer-free in November. Base editing and multiplexing have the potential to provide more effective CAR-T treatments for patients with otherwise incurable cancers.

Prime Editing: In 2022, Dutch scientists at the Hubrecht Institute, UMC Utrecht, and the Oncode Institute used another form of gene editing – prime editing – to correct the mutation that causes cystic fibrosis in human stem cells. In addition, Korean researchers at Yonsei University used prime editing successfully to treat liver and eye diseases in adult mice.

CRISPR Gene Editing: Awarded the Nobel Prize in Chemistry in 2020, CRISPR gene editing has delivered functional cures for beta-thalassemia and sickle cell disease. CRISPR Therapeutics and Vertex Pharmaceuticals have treated more than 75 patients, resulting in some well-publicized “functional cures”. They are expecting FDA approval for Exa-Cel, the treatment for sickle cell and beta thalassemia, in early 2023.

Other Cell and Gene Therapies: In 2022, regulators approved several landmark cell and gene therapies, including Hemgenix for the treatment of Haemophilia B, Zyntelgo for beta thalassemia, Skysona for cerebral adrenoleukodystrophy, Yescarta and Breyanzi for Non-Hodgkin lymphoma, Tecartus for mantle cell lymphoma, and Carvykti and Abecma for multiple myeloma.

Molecular Diagnostic Testing: Liquid biopsies – blood tests – are enabling the early detection of colorectal cancer which, if discovered at or before stage 1, have a five-year survival rate greater than 90%. Late-stage or metastatic cancers account for more than 55% of deaths over a five-year period, but only 17% of new diagnoses. Thanks to regular screening and liquid biopsy, colorectal cancers are now among the earliest detected cancer types, 37% at or before stage 1. In 2020, the death rate from colorectal cancer was 12.8 per 100,000 persons, 38% below the 20.7 in 2000.[24]

With many thanks for your support and high hopes for innovation in the coming years.

DISCLOSURE

This material is for informational purposes only and is subject to change without notice. All statements made regarding companies or securities are strictly beliefs and points of view held by ARK and are not endorsements by ARK of any company or security or recommendations by ARK to buy, sell or hold any security. Historical results are not indications of future results. Certain of the statements contained in this material may be 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. The matters discussed in this material may also involve risks and uncertainties described from time to time in ARK’s filings with the U.S. Securities and Exchange Commission. ARK assumes no obligation to update any forward-looking information contained in this material. Certain information was obtained from sources that ARK believes to be reliable; however, ARK does not guarantee the accuracy or completeness of any information obtained from any third party. ARK and its clients as well as its related persons may (but do not necessarily) have financial interests in securities or issuers that are discussed.

An investor should consult a financial professional, an attorney, or tax professional regarding the investor’s specific situation before making any investment related decision.

Last week, Tesla delivered to PepsiCo the first in a 100-vehicle fleet of heavy-duty electric semi trucks with a driving range up to 500 miles.

Tesla demonstrated that, fully loaded, its semi truck made a 500-mile trip without recharging, thanks in part to its impressive regenerative braking capability. The semi truck traveled up and down the 4136 ft. Grapevine Mountain, which barely changed the slope of the battery usage curve, as shown below.

During the event, Tesla also disclosed the Cybertruck’s charging power. According to ARK’s research, Wright’s Law can forecast improvements in electric vehicle charging rates, as shown below. A useful metric that incorporates the efficiency, range, and power capabilities of battery systems is miles of range added per minute charged. Importantly, both the semi truck and the Cybertruck use 1 MW chargers. If it does deliver the Cybertruck with charging power as disclosed at this event, then Tesla could reach the EV performance that ARK had projected for 2026 in 2023, three years ahead of schedule!

ARK’s evolving electric vehicle (EV) sales forecast is pointing the way to an all-electric auto industry in the next five years. The navy line in the chart below illustrates that, as the average price of an EV has declined, EVs have gained share of all cars––both internal combustion and electric ^[1] as depicted in the purple line. Our conclusion is that all new vehicle sales will be electric if prices drop to ~$14,500 on average.

While production capacity may not hit 80 million units, EVs still could account for ~90% share of the market by 2027.

How?

By 2027, consumers probably will conclude that buying a used car or waiting to buy a new EV will make more economic sense than buying a new ICE vehicle. As a result, ARK’s research suggests that new vehicle sales globally will drop as internal combustion engine vehicle sales collapse from ~70 million units this year to roughly 10 million units, as shown below.

Such a drop in ICE vehicle sales could set in motion a death spiral for incumbent automakers. As EV prices decline, consumers could delay their EV purchases or purchase used vehicles at the expense of new ICE vehicle sales. As a result, the factory capacity utilization of ICE vehicles could drop, forcing an increase in depreciation expenses and, in a vicious cycle, boosting ICE vehicle prices further, at the expense of their competitiveness to EVs.

[1] ARK adjusted prices to reflect global numbers.

During our brainstorm on Friday, ARK discussed the possibility that our already high-end EV forecast could be too low. The chart below is work-in-progress that offers some perspective on this topic. The purple line depicts the price elasticity of demand for all cars, both gas-powered and electric: as prices drop, auto manufacturers can target a larger share of the market. According to the navy line, as the average price has declined during the last 10 years, EVs have increased their share of the global auto market.

According to Wright’s Law and ARK’s adoption model, as the cost to produce 300-mile range EVs continues to decline, their market share will approach ~67%, or 48 million units, in 2027, as depicted in the green line. This forecast incorporates a decline in total vehicle unit sales due to autonomous vehicles. The gap between the trajectory suggested by Wright’s Law in the green and the history of market share gains in the purple suggests that EVs are likely to capture a much higher share of the market than ARK has forecasted. Instead of 48 million units, EV sales would scale 8-fold from 8-9 million units this year to roughly 67 million in 2027!

That said, several forces could derail the 67-million-unit forecast. Perhaps because of materials shortages or technology issues, EV production will not be able to scale that quickly. Perhaps a severe decline in used car prices will pose more of a competitive threat than we anticipate.

Stay tuned as we continue to finalize our model and forecast.

Last week, Reuters released its third installment of a series that tracks automaker plans to invest in electric vehicles and batteries. Since its first analysis in 2018, these investment plans have scaled 13-fold, from $90 billion to $1.2 trillion, as shown below.

Automakers will focus ~$600 billion of the $1.2 trillion investment on electric vehicles (EVs), which, depending on capital efficiency, suggests that EV production could scale from 8-9 million units this year to a range of ~40 to ~90 million units. According to ARK’s research, as of 2016, the auto industry had invested more than $14,000 in fixed assets per unit produced. At that fixed-cost base, $600 million would provide capacity for ~43 million EVs annually. Previously, Ford suggested that efficiencies could lead to a 50% reduction in capital investment for the production of EVs. Tesla has proved that forecast to be true. As a result, $600 billion could facilitate the production of roughly 86 million EVs per year, as shown below, roughly in line with total global auto production today.

Reuters’ report is focused on global automaker capital spending plans through 2030, but ARK believes that competition will increase investment plans and accelerate timelines. Many traditional auto manufacturers are likely to go bankrupt as the industry transforms––from internal combustion engine to batteries and from human-driven to autonomous.