ARK Invest’s Fintech Analyst Max Friedrich — His Square Thesis, US SuperApps, and Big Ideas!
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“We’ve identified through our own research these 5 technology platforms, where we believe future historians will look back on them and say:
‘Hey, this was as big as the computer or electrification.’
Those 5 innovation platforms for us are Gene Sequencing & Editing, AI, Robots, Energy Storage, and Blockchain.”
Today on Wharton FinTech, we take a trip into the public investing space with Max Friedrich, Fintech Analyst at ARK Invest.
ARK Invest focuses solely on disruptive innovation and offers investment solutions to investors seeking long-term growth in the public markets. They offer numerous products including ARKF, their Fintech Innovation ETF. Check out their website — it has a lot of great information!
Max and I have a great conversation in today’s episode as we cover:
- ARK’s 5 “Big Ideas” (4:45)
- Why Tesla was missed by many great analysts (7:25)
- The power of Twitter and ARK’s open-source research approach (8:30)
- How they think about valuing high-growth companies (13:16)
- The boom in Digital Wallets, Chinese SuperApps, and what that means valuing them for the US (18:23)
- His Square & CashApp thesis (23:50)
- Current private valuations (33:45)
and much more!
Here are some notable quotes below to get you started:
ARK’s Hiring Approach
“Just generally not hiring out of traditional finance paths is very typical for ARK. And I think it’s also part of what makes ARK special.
The general thinking behind that is it’s easier to equip either people with very deep sector or technology knowledge with the skills around finance than the other way around. And also just equip people that just by nature, arevery curious about technology to equip them with finance skills, like I said, then the other way around.”
ARK’s 3 Key Research Differentiators (in Max’s view)
- Regarding their 5 technology platforms:
“We basically model those out on a five or even longer time year horizon. And we think that by doing that kind of long-term work, we can identify inefficiencies in the market, where we think that the market has not really priced in the opportunities that are embedded in those innovation platforms...And that is obviously different from a more kind of short-term outlook that that a lot of Wall Street has.”
2. On spotting technology convergence
“[Cathie] saw already…that different technologies were converging. And that made it harder for traditional research departments to really holistically understand companies. So one example that is very prominent in the media is Tesla, where we think that at least for the last few years, it was really hard for traditional automotive analysts…to really understand the company…You really need to look at the company from a number of different perspectives…you need to look at it from an energy storage perspective, because it’s about battery technology, you need to look at it from an AI perspective, because there’s obviously the big call option of autonomous driving, and they’re also already using their own AI hardware chips. And you can even say, maybe this is kind of a robot that is driving around there on the street already...And this that kind of convergence.
3. A more open-source and ‘building in public’ style of research
“What I would say is that the value add that you get from talking to experts on social media, often for free, can actually be pretty high, especially on Twitter…a product manager for me in the FinTech space that actually has skin in the game and has done this for a number of years on a very deep level and understands regulatory ramifications. That exchange is actually pretty important.
And the way to earn our opinion, at least to actually access even more of that is to also embed yourself into those conversations and discussions. So that’s why all the ARK analysts are on Twitter, and they share their research and they try to engage with others on Twitter.
We’ve also put some of our models on Git Hub and actually gotten responses as well…if you’re in the business of forecasting, often exponential growth over a long time period, your input assumptions are pretty important. Because if you’re wrong about them, you’re going to be exponentially wrong.”
China & SuperApps
“So for us where it really started was in China, where we saw WeChat Pay and Alipay emerge over the last 10 years…for us, what was the critical moment was when in 2017, mobile payment volume overtook Chinese GDP. And that is special because there are not that many KPIs larger than the country’s GDP, especially China’s GDP!
…what you will see for WeChat Pay is that 50% of the screen, is actually not reserved for financial services, but other commercial services. So you can order food taxi, buy movie tickets, or what not. So, there’s this commercial function as well. The way that we like to think about these digital wallets and…companies like Square in the big ideas presentation is to kind of outline, What is the opportunity here? What would happen at maximum penetration?”
Square
“If I look at a company like Square, of course, I could think about where is the attach rate for the Square Cash App, debit card gonna be in the next quarter? But first of all, I’m just kind of guessing. And second of all, I don’t really know what Square’s going to do in the next quarter, they’re probably going to launch maybe another lending product or something that I don’t know. So rather than trying to predict everything from a bottoms up perspective, in this big ideas presentation, we kind of asked the bigger top down question…”
“What is the average US adult worth - What are his or her financial services relationships worth? We think that’s worth roughly $10,000 split between payments, insurance, credit, saving, and spending and brokerage.”
“What we have found is that cashapp’s approach of acquiring customers through peer to peer payments, is just a super power. And their ability to acquire customers at $5 per customer is just a huge advantage not only versus traditional financial institutions, which are paying up to $1,000, but also to other fintechs, which are not growing organically through peer to peer payments and the network effects that stem from them.”
These are just some quotes to get you started — I thoroughly enjoyed today’s episode! Enjoy the show.
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You can read more about ARK here, including some topics we weren’t able to cover:
ARK Further Commentary on Liquidity
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Ryan Zauk
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Ryan Zauk is an MBA Candidate at The Wharton School, where he runs the Wharton FinTech Podcast. He currently works with the US International Development Finance Corp looking at technology impact investments in developing markets. He has a passion for music, media, and all things FinTech.
You can reach him at rzauk@wharton.upenn.edu or on Twitter.
