The Equity Market Cap Associated with Technologically Enabled Innovation Is Likely to Grow Exponentially
This blog was co-authored by ARK’s Client Portfolio Manager, Thomas Hartmann-Boyce, and ARK’s Client Portfolio Specialist, Dan White.
According to our research, emerging innovation platforms will transform our lives and the global economy radically, scaling their equity market capitalizations potentially from roughly $14 trillion today to more than $200 trillion in 2030. ARK has identified five innovation platforms––artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology––that will be the nucleus of change and are likely to act in concert, each feeding the others.
Spurred by the coronavirus crisis, these platforms converged to solve many problems during the last 18 months. As a result, the enterprise value associated with their companies doubled from roughly $7 trillion in 2019 to $14 trillion in 2020, as shown below.
During the next ten years, according to ARK’s estimates, these five innovation platforms will generate more than $200 trillion in enterprise value, as shown below. In their infancy today, we believe these platforms represent significant growth opportunities in the long term.
Traditionally, advisors and consultants have calculated the capacity available in an investment strategy by the total market cap in existing benchmarks, a measure that we believe will become less relevant with time. Thanks to the convergence between and among the five innovation platforms around which ARK has centered its research, technology is likely to evolve at an accelerated rate, increasing the universe of innovative companies significantly. ARK focuses on opportunities likely to scale exponentially in the future as opposed to those that already have scaled.
Investment strategies geared to the future evaluate complex dynamics that can evolve rapidly. Take the coronavirus pandemic. Seemingly overnight, demand for innovations in such diverse areas as DNA sequencing, artificial intelligence, and e-commerce surged. In response, ARK’s analysts pivoted quickly and focused on the accelerated rate of adoption of the five innovation platforms and their fourteen underlying technologies. As a result, we increased our exposure to digital wallets, electric vehicles, genomic sequencing, molecular diagnostics, 3D printing, and drone delivery/robotic logistics. In our view, the coronavirus crisis changed many behaviors profoundly and permanently. We believe that these five innovation platforms will add dramatically to investment opportunities in the future. They will displace old technologies and enable humans to achieve feats that seem unimaginable today.
We also believe that three market trends will bolster the investment opportunities associated with these innovation platforms.
New Market Trends
Three market trends could expand investment opportunities in the innovation space: new innovation indexes providing benchmarks for institutional investors; geographic competition for innovative companies; and the proliferation of initial and secondary public equity offerings, including SPACS.
1. New Innovation Indexes that Provide Benchmarks for Institutional Investors
MSCI––a leader in creating and maintaining global equity indexes––recently launched a suite of five innovation indexes focused on strategies like autonomous technologies and industrial innovation, genomic revolution, next generation internet, and fintech. As of October 2021, the total market capitalization of the stocks in the suite was $13.8 trillion. ARK’s research team collaborated with MSCI by advising on theme definitions and providing insight into innovative companies’ business activities and their link to themes.
Interestingly, based on the final index methodology designed to capture the investment strategies above, the number of public equities within the MSCI ACWI IMI Innovation Index more than tripled from 198 to 602 constituents in the eight years from June 2013 to June 2021. During the same time, the total number of public equities in the MSCI ACWI IMI Index stayed relatively constant. In other words, innovation took significant market share, rising from 3% of the MSCI ACWI IMI Innovation Index in 2013 to 18% in 2021.
As innovation’s market share has grown, investment capacity––as measured by average days to trade––also has improved significantly. In fact, as shown below, average days to trade the MSCI ACWI IMI Innovation Index dropped more than 25-fold, from 85 days to roughly three days, during the last eight years.
2. Global Competition for Innovative Companies
As countries in Asia, Europe, the Middle East, and Africa compete to attract new companies, innovation is expanding globally. As of June 2021, the percent of stocks in the MSCI ACWI IMI Innovation Index domiciled outside the United States was 48%. Since mid 2013, as shown below, the number of international stocks in the index has more than doubled from 98 to 209, a trend that we believe not only has created more investable and often inefficiently priced investment opportunities but also has expanded capacity and diversified geopolitical risk.
3. Initial Public Offerings, SPACS, and Secondary Offerings
Thanks to innovation that has been germinating for the last 20 to 30 years and now, we believe, is flourishing, the number of initial public offerings (IPOs) and special purpose acquisition companies (SPACs) increased to a record high in 2021, as shown below. A SPAC is a shell corporation listed on a stock exchange created to acquire a private company without the regulatory oversight, initially, associated with a traditional IPO. Reversing a decline in the universe of companies listed publicly during the past 10 years, in our view many innovative companies now are going public to raise the capital necessary to scale exponentially.
Adding to the capacity associated with innovation and reversing a downturn that began in 2014, secondary equity offerings have doubled at an annual rate since 2019, as shown below. In our view, this upward trend will accelerate as publicly traded small cap innovative companies attempt to strengthen their competitive advantages by funding research and development programs, capital expenditures, and strategic acquisitions. Typically, the increased trading volume associated with secondary offerings improves liquidity, adding to the capacity associated with innovation in the public equity markets.
We believe that as innovation platforms evolve rapidly during the next five to ten years, companies capitalizing on and scaling with them are likely to access the public equity markets. ARK’s five innovation platforms––artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology––currently constitute between 10% and 15% of global equity market capitalization. As of October 31, 2021, ARK’s $73 billion in total assets represented less than 0.55% of all publicly traded innovation stocks around the world, as measured by MSCI ACWI IMI Innovation Index. According to our research, the market cap of innovative companies will scale exponentially during the next five to ten years, as should ARK’s capacity.
Source: MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.