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It is International Women's Day and with us a recognized, much talked about and followed individual, well known investor who also happens to be a woman, and safe to say, the person who ignited the investment thesis around the innovative and disruptive theme and economy just about ten years ago. So let's get to our interview. Great to have back with us.
Kathy Wood.
She's the founder, CEO and CIO of ARC invest and she joins us once again from Petersburg, Florida. Hey Kathy, I'm so great to be talking with you again.
How are you? I'm great? How are you doing? Carol?
Doing well, trying to keep up as you know, of the newsflow kind of fast and furious. Let's talk about the economic backdrop, because your roots, right when you started out, you are an economist and you think about things the macro environment, the jobs report today some strength, maybe some concerns about things starting to slow down. What does the US economic environment look like to you, the business environment as well, and what it means for some of your investments.
Sure, it looks like that corporations are losing pricing power, and we are now beginning to see the unemployment rate move up. It went up to three point nine percent in this latest report from a low of three point four percent, So undeniably it's on its way up now, and we do think it's because corporations are losing pricing power. Their margins are getting hit. It's going to it's going to cause a couple of things. One, the labor hoarding that we've seen since COVID is going to diminish, and
that will increase the unemployment rate. But then the second thing is it will accelerate the adoption of technologies. Innovation solves problems, and one of the things that it does is increased productivity, increase efficiency, and create new products and services. So we're pretty optimistic about our strategy in this environment because interest rates should come down. I think that the FED, even the FED is going to be surprised at how
low inflation goes. We think it could be negative this year.
Well, so, Kathy, let me ask you. That's interesting. I mean, if the expectations, at least according to traders right now is that the first rate comes in June. Is that too late in your view for the Fed to start cutting rates?
Well, I think the twenty fourfold increase in interest rates and little more than a year have shocked the system. We're beginning to see a reverberation of the regional bank issues. We don't think they are going away. Deposits are still outflowing broadly from the banking system, and there are increasing problems with commercial real estate. Most people know about the off problems, but multifamily units, multifamily apartments. We're beginning to
see some distressed sales there as well. So I think that problem isn't as well understood I think, and it's going to cause the regional banks even more problems.
Kathy, how quickly do you think unemployment can go up this year? What are you forecasting over at ARC?
Well, I wouldn't be surprised to see the unemployed employment rate go above five percent.
Now.
I'm saying that knowing that this is an election year and that this administration probably will try and spend more than is currently in the budgets through executive order or what have you, But above five percent would not surprise us, all right, So, about five percent.
Well that's interesting, all right, so we have a good idea of your economic and kind of macro backdrop. Having said that, so here we are sitting at a day where we're seeing a little bit of a pullback in stocks, but you're to date the S and P still up more than seven percent. We're looking at a Nasdaq one
hundred that's also up more than seven percent. You look at something like the socks is up around twenty percent year today, picking an individual name like an Nvidia more than eighty percent, and I could go on and on and on. There are many who talk about a bubble, some like in it back to ninety nine, two thousand, anything in today's equity trade that says bubble to you, We do.
Not believe we're in a bubble anything like we were in the late nineties. I was there, and the technologies weren't ready, the costs were too high, too much capital chase, too few opportunities, too soon. The seeds for what is happening now were planted during the twenty years that ended in the tech and telecom bubble, and they've been germinating for twenty five or thirty years. So we're we believe we're ready for primetime. The one play where we could
see a correction and it's just a correction. We're not calling at the end of this at all is in the chip space. Whenever I hear the word shortage, and we started hearing about GPU shortages about this time last year as chat GPT was capturing the imagination of both businesses and consumers. So for about a year we've heard that word and now we're seeing lead times we believe come down for GPUs for nvidians in particular from the eight to eleven month range to the three to four
month range. So that is suggesting that there was probably a lot of double and triple ordering as the word shortage was making the rounds, and that those inventories will have to be digestible.
Is that also because of an increase in supply in terms of output or is it because you think demand is going which one is it? Oh?
I don't think no, No, demand is not going down, though there is something we expect that I don't hear discussion very much. And it hearkens back to the early days of the Internet. There was a moment when the Internet was taking off, when Cisco was all the rage, and then enterprises started thinking seriously about the need to spend aggressively on this new thing called the Internet and the backbone, and they paused as a lot of competitions started to make the rounds and Cisco went down fifty
percent plus as enterprises were pausing. Now, why are enterprises likely to pause or at least go through an assessment. They have to integrate all of their data first, proprietary data is the secret to AI's success. And they have to map out in excrew shading detail their workflows internally and with suppliers and customers and so forth. And this is going to take time. So we think this is this movement is real, is going to be massive, but we think there's been a little bit too much too soon.
Well, it's interesting to hear you say that, Kathy, because you and at ARC were very early to acknowledge the impact of AI. Yet your flagship Our Innovation ETF has not held shares of Nvidia in about a year. You do own some of it in your other ETFs. Do you have any regrets about not having held onto the stock or actually increasing your exposure in the last couple of years After more than five hundred and thirty percent gains since twenty twenty two since the end of twenty twenty two.
Yes, so you're right. We were very early into Nvidia ten years ago when it was five dollars. Now it's roughly eight hundred dollars, and I wrote it most of the way up. But I'll tell you what we did, and this is as a portfolio manager. It's not one action but what it causes in terms of another action. Last year we sold in the flagship in Vidia and put it into Coinbase. Coinbase, I believe is up as at least as much as in VideA, and it is
much less well understood. The whole crypto movement, the crypto asset movement, Bitcoin as a new asset class and so forth, is not well understood or completely accepted out there. So we prefer to go where others are not traveling as much. And you know, as we were moving out of in Video, we were saying, okay, regulators are trying to crush coinbase here, and we were buying it on every dip in Video. Have to happen to be one of the sources for that purchase. So it's not just what we do on
the cell side. It is what we do on the buy side that you have to look at. And yes we do hold it in the more specialized funds, but we've been taking profits there as well for reasons I just described.
Yeah, and to be fair, you're right. Coinbase is up about six hundred and twenty percent since the end of twenty twenty two, so that compares with about five hundred and thirty percent gain in nvideo. Is there anything, though, Kathy in the end video story that would make you we think the name and want to become more aggressive on it.
Yeah, if the price came down a lot, we would you know, the rate of return expectations or split? Would a split do it?
Because I know we've been never.
No, no, no, that wouldn't change. That wouldn't change anything. No, no, split adjusted than the price. So you know, if you look at our portfolio, is what we're trying to capitalize on with a Palenteer for example, are the next stages of this AI revolution? What we're seeing in the GPU side of things is Nvidia all praise to Jensen one, I mean, just unbelievable company execution, vision and so forth.
And it's not over. It's going to last a long time, but there are going to be many other companies benefiting from AI. The productivity lift alone is going to be massive, the most massive productivity lift in history, we believe. And so this AI revolution is going to be broad based and is going to benefit a lot of companies. On the GPU side, of course, we have AMD as competition, but many people do not understand that there's a lot
of other surreptitious competition evolving out there. Each of the hyperscalers is evolving its own chip strategy. You have a Tesla that has designed its own chip for AI, chip for the specialized, more specialized autonomous driving opportunity, and I think you're going to see a lot of companies developing more specialized chips. We know that Nvidia, of course, will
segment the market as well. So we just think that a lot of the assumptions for Nvidia, you know that this is in Nvidia's market, and it's alone that those are changing.
Well, we're speaking with Kathy Wood if you're just joining us. She's the founder and CEO and chief investment officer of ARC invest. She joins us from Saint Petersburg, Florida.
So it's interesting Kathy two to you know, right everybody seems to be out there making chips, and it's funny. We had a conversation yesterday with Chris Miller, who wrote the book Chip Wars, and we talked about TSMC that everybody can kind of design what they want, but ultimately, right now they've got to come back to TSMC as the fabricator to make them. So as you say that, I mean you guys, and one of your funds, I think late last month was selling shares of TSMC. I
am curious about then you're thinking around TSMC. There's a story today too about TSMC winning more than five billion in grants for their US chip plant, so money, you know, certainly being devoted to them. Why maybe pull back a little bit on TSMC or what is your case for TSMC in the long run.
Well, the case for TSMC is, yes, it is the manufacturer of these merchant chips, so very big story there. But this is simply a cyclical call and it has to do with that word shortage and TSMC. For example, Broadcamcom reported last night I listened to that call. In the semiconductor solutions part of their business, they were up only four percent, AI up thirty five percent, but everything
else down. So there are are some cyclical phenomenon out there, phenomena out there that we think are not they're not being integrated into the short term expectations for a number of stocks, hey counting including Yeah.
So, Kathy, I want to move on to Tesla because you brought it up a moment ago. You've been a long time bull on Tesla. You have been buying shares recently after selling them for most of twenty twenty three. The stock down about thirty percent so far this year. We covered the news this week that ship beens from Tesla shang High Factory sank to the lowest and over a year in February. The challenges facing the EV industry have been well documented. We've talked about those a lot.
Why do you still like Tesla considering all of the challenges in the EV space and also what many critics would say are disappointing fundamentals.
So, yes, you're right. We were selling last year as it was in the three hundred to four hundred dollar range. It's back to one seventy five. And this is what portfolio managers do. We have a five year investment time horizon for Tesla and our price expectations from here. I mean we see roughly a seven to tenfold increase. I know we're in the process of revising our model, so I'm not at liberty to give you the new number.
But would that new number be higher or lower than two thousand?
Well, we're pushing it out a year, and therefore it will be higher because the autonomous taxi platform opportunity will be in full force. We think and we believe that Tesla will get the lion's share of that market here in the US, if not elsewhere. Autonomous taxi platforms are SaaS models. Tesla's current gross margin is well, it's in the teens right now because it's been cutting prices, but we think normalzed the ev margin is in the thirty
percent range. SAS margins are in the eighty percent range. Most analysts focusing on the stock have nothing in their models or very little for autonomous. Our confidence that autonomous is going to happen has increased because it has happened. We see way most successful. We see a lot of success and commercial success. That is in China. It can be done. We think Tesla will launch a national service
and Tesla this is where AI comes in. Tesla has orders of magnitude more data than all of the other auto and tech company companies going after this market combined. And what's important about that is that it has corner cases that nobody else has, rare, rare occurrences on the roads that it has recorded, and it is prepared for it, but others aren't.
Kathy, just don't happen. I just want to jump in. It's kind of like a running joke with the Tesla community because Elon Musk says every year we're going to have this autonomous driving technology, and every year since he started saying it, what twenty seventeen, twenty eighteen, it has failed to materialize. Why are you so confident it's going to happen in the near future.
Well, because it has happened, as I just said, and so it's not. It's not if it is when. That's the most important reason. Interestingly, in his last conference call, Tesla's last conference call, Elon said, yeah, I know I've been wrong about it, so I'm not even going to make a projection. I actually thought that was good and maybe he has a better shot now. And we're looking at some of their hiring and their job postings and seeing rumblings in different cities that they're starting to get ready.
Hey, Kathy's something I know I've brought up this with you before, but I think back to are you and my first interview back in May of twenty fourteen, so almost.
Ten years ago.
But you brought up Elon Musk when he wasn't a household name or what his company was doing, and you likened him to Thomas Edison. And I guess what I want to ask you. You know this individual, you talk with him, you followed him obviously for a long time. Do you ever feel, you know, do you feel that way still about him in terms of likening to someone
like Thomas Edison? And how do you find clarity and feel comfort in some of the questionable and controversial things that that Elon comments on or that he says.
Yes, well, we we're focused on the technology and we're as is he. He is the inventor of our age. And this age is a very special age because the five major innovation platforms around which we have centered our research are converging, and three of them he is helping to converge. This autonomous tech see platform Opportunity is the
convergence of robotics. Autonomous vehicles are robots, energy storage, they will be electric and artificial intelligence, where those are three separate s curves feeding each other and should lead to super exponential growth. He has understood this idea that technologies are going to converge with one another, and that is
the way he's been thinking his first principles research. Just because something's been done one way for a very long time, think autos, doesn't mean it's going to remain that way, and that's why he's going to win.
Do you ever feel though that he gets distracted or or.
Candidate to it. Yeah, he is so laser focused on technology, and in the case of Tesla, the electric vehicle side that is on automatic pilot. They are just scaling and what he is doing is becoming, you know, the manufacturer of factories. He's trying to figure out how to automate and continue to drive down the costs there. His focus is on autonomous now certainly, and of course you can say on X he's distracted, but he's really more focused
on the innovation. How can I go back to the future where I started, which was in the payments app Space sold to PayPal. How can I turn this into not only a payments app, but an everything app? And I think he's hard at work doing that in ways that we don't know yet.
We are, of course talking with Kathy Woods. She's the ceocio and of course founder of arc invest joining us from Florida.
Hey, Kathy, you're talking about the future of transportation. We got to talk about Archer Aviation. One of the most read stories today is about the company that you've been buying up. It's a developer of air taxis, Archer Aviation. Your stake around ten percent across several of your ETFs. You're the third largest investor in the name. We should note shares down roughly thirty percent so far this year. As our own Sam Potter writes today, you are once again on the other side of a short call made
by Grizzly Research. Last time you were in a similar spot regarding a different name, Too Simple. You lost a lot and eventually sold most of your position. So talk to us about why you believe in Archer and does it ever worry you to go against the short sellers.
So our investment process is centered around research and original research. I'll start with Too Simple. We sold too simple after the CEO who was the technology visionary left and so Grizzly got that right. I don't think for the right reasons. Although we were in the teeth of a massive bear market as well. If that CEO had not left, I don't think we would have sold that stock. In the case of Archer, we have a high degree of confidence
in Archer. One thing to understand about ARC is we are the closest ARC is the closest you'll find to a venture capital company in the public equity markets, and we tread where others in the traditional asset management world will not go, at least on the public side, when we see a real opportunity. As we're doing our work on autonomous vehicles, we concluded that the cost is going to drop so much that roads are going to become very congested in the future, much more congested if you
can imagine New York City. And so we then started doing work about transportation in the skies. Is it possible, Yes, it is possible. The FAA is the gating factor from a regulatory point of view. There are two companies the FAA is working very closely with, and I think because of successes elsewhere in the world. Other companies are having
success where regulators have not been as strict. I think there's been a little more pressure on the FAA to pay close attention here, and the two are Archer and Jobi. Our confidence went up when Boeing, which was suing it for patent infringement, settled the case and actually took an ownership position in Archers, as has Stilantis and United Airlines. So three very deep pocketed partners who are also trying to figure out the future of transportation. And we know
that they're on their way. Both Joby and Archer two FAA certification. Seems like the process is in motion and we haven't had a hiccup. And it has an MoU with Abu Dhabi to launch an air taxi service in twenty six and pending regulation, it has an MoU with inter Globe to launch an air taxi service in India. Both of those have been much better from a regulatory point of view.
But how big of a concern is it to you that regulators here in the US could drag their feet. We did speak with an airline executive recently who is concerned that the FA is moving slower than other regulatory bodies when it comes to this type of technology.
Yes, and that is why we pay a lot of attention to regulatory arbitrage. We've seen innovation move abroad to other countries, even Amazon. You know, the FAA wouldn't let Amazon fly its drones ninth generation nearly ten years ago on its own property outside, so it went to India and elsewhere. I think the pressures on the FAA now.
And I also think that the bear market of twenty one and twenty two eliminate a lot of other competition that was brewing just the funding markets were closed, and so I think this market is much more is that both Jobie and Archer are going to have much more share than otherwise would have been the case. So we're pretty excited about the possibilities here.
Hey, Kathy, as you said, you know, one of the things about ARC it certainly and it's the DNA, is that you go places and take positions that other people maybe don't do. And one of the things though that increasingly I feel like the financial establishment again is interested very much so is in crypto and I want to talk about your spot bitcoin ETF if I may the RC twenty one shares Bitcoin ETF.
What can you tell us.
About institutional interest in it? Is there or is it mostly the funds that are going into it are mostly from the retail side.
Well, we are. We know there's institutional interest because we're talking to a lot of institutions, state treasurers and public pension funds. And why is this Because they're trying to figure out if this truly is a new asset class, and if it is, they must have a point of view as a fiduciary if there's a new asset class which is uncorrelated or shows very low correlation in terms of returns relative to other asset classes, than what an asset allocator does is it will take a position to
increase returns per unit of risk. That's what happens with low correlation of returns. So definitely, now are they moving
whole hog? Not yet. Nor are the big wirehouses like the Morgan, Stanleys and Ubs as wells Fargo, marri Lynch b of A. They are all waiting to see who are the winners in terms of the ETFs because they do not want to commit to an ETF that will close down and makes sense and right so, and they they're going to give it from what we're hearing three to six to nine months, so everything the net inflows that we've seen and are away from those two spaces.
Really it's part of it is our client base switching from GPTC into and other client bases into the ETFs, which are much lower.
Fee, all right, But I do want to also then go to the next level, and that is an ether ETF being approved maybe in May. Are you optimistic that it's going to happen by that made deadline or what obstacles might be still out there that it won't make that deadline.
Yeah, So the biggest obstacle is staking, and I don't think the regulators will allow staking in this first round if they allow the first round at all. Now, we and one other firm are are we'll see our final deadline in May if they reject. If they reject our filings, then we'll have to refile. But my guess is my guess is they will move more now to a first come, first serve when this next round goes through. So if it's May, it'll be without staking. If it's later, there's
a better chance for staking. If it's in I would say twenty twenty five because I think legislators and legislation is starting to get involved here and taking it away from simply the regulators.
Hey, Kathy, I don't want to leave without asking you. It is International Women's Day, and I think about your path. We Tim and I have been talking a lot to many women who have made their way in male dominated fields, and I'm just curious and how you think about your
trajectory from where you started and what you've achieved. You started two firms or have co found one and started your own firm, how you think about that path and what is top of mind in terms of those other individuals and other women that are out there that are maybe trying to do the same.
Yes, well, I think the most important thing in early years is to make your own bosses look brilliant because younger people, younger people coming into the business know so much more about technology and where the world is going
almost innately then shall I say, more seasoned investors. So just make your bosses look brilliant and educate them, and you know, generate enthusiasm, enthusiasm, excitement, energy around around ideas and make sure you have good mentors if they're not giving you a good shot after you've made them look brilliant, you know, time to So that's one thing as far as starting a business, I would say, make sure there's
an unmet need. In our case. In the case of ARC, what we saw was the traditional world going more passive or benchmark sensitive, when we saw an explosion of innovation thanks to the five major innovation platforms around which we have centered our research and investing, and so I said to myself, you know, someone has to do this, and so we went off, and honestly, I think most people
thought we would fail for a couple of reasons. One, we put a truly active, fully transparent equity portfolio inside an ETF wrapper, and that had not been done at scale at all, and no one it was a passive world that we had entered. And then the second was we're benchmark agnostic. You can put us against any benchmark, and you're going to have to give us some time after the massive interest rate shock that we went through and now we're on the other side and and you know,
performing better as a result over the last year. But over time, these innovations are going to transform the world and create massive wealth with AI as back to back to that topic as the main catalyst, so we could be more optimistic about innovation.
All right, kind of leave it there, Kathy, as always so appreciate all the time that you do give us. Have a great weekend, Kathy would of course the founder, CEO, and CIO of ARC Invest joining us from Florida. Kathy, thank you.