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It's Sunday, October 6th, 2019. Please enjoy ARK's weekly newsletter curated by our thematic analysts and designed to keep you engaged with disruptive innovation.

According to TSMC, Moore’s Law Is Not Dead… It’s Not Even Dying

Follow James on Twitter @jwangARK


TSMC—the world’s leading chip foundry—does not believe in the death of Moore’s Law. Its Vice President of Research, Philip Wong, says that Moore’s Law is chugging along and should power TSMC for the next three decades.


TSMC is leading the industry with 7nm chip manufacturing, enabling customers like Apple and AMD with power efficient processors. The next node, 5nm, already is in risk production, and 3nm already is in early development. As they approach the size of atoms, however, transistors will require novel manufacturing techniques to reach higher density and performance.


The main path forward appears to be3D integration—stacking chips on top of one another. Already in use for high performance memory today, TSMC believes that stacking memory and logic will improve memory capacity and bandwidth, both critical for AI applications. With next generation nanomaterials, memory performance could improve almost 2,000-fold.


We believe that despite TSMC’s upbeat messaging, Moore’s Law during the next few decades is unlikely to resemble the past. Innovation is moving from transistors to packaging technology, making chip architecture and software optimization even more important going forward.


Unlike in the PC era when Intel’s x86 architecture dominated, AI probably will require more heterogenous architectures, with many designs for many markets. TSMC, we believe, is the agnostic enabler in such a world. Unless Intel is able to win on multiple fronts - CPUs, GPUs, AI accelerators, and automotive - it probably would be better off parting with its fabs.



Here Is Our Preamble to What We Believe Has Gone Wrong With Venture Capital

Follow Max on Twitter @mfriedrichARK


In the process of writing a white paper detailing the overvaluation and excesses in the pre-IPO venture capital space, we have come across several data points that we would like to share.


The venture capital industry been the beneficiary of a “gold rush” during the past decade. Pension funds alone have increased their allocation to alternative assets, including venture capital, from 7% in 2008 to 20% in 2017, a $2 trillion shift. In addition, between 2014 and 2018 large university endowments nearly doubled their exposure to venture capital, following David Swensen’s 20-year lead at Yale. In return, in 2018 alone venture capitalists deployed a record $258 billion into startups globally. As a result, during the past five years, the number of startups valued at more than $1 billion - so-called unicorns - has jumped five-fold from 80 to more than 400, with an unrealized value of $1.7 trillion waiting to tap the public markets.


While venture capital has enjoyed a period “up and to the right,” this week Preqin released fund data that calls into question the sustainability of that trend. Since 2016, for example, venture capital assets under management (AUM) have been growing rapidly while their capital calls as a percentage of AUM have been declining, as shown below. In dollar volume during 2018, capital calls declined 2% on a year over year basis while AUM grew 28%, suggesting that the demand for venture capital is lagging behind the supply, inflating valuations. As a result, startups are buying $60 million private jets and opening restaurants as the discipline associated with traditionally tight funding disappears. Increasingly, we believe the revenue growth of VC-funded startups is a function more of fundraising than of business strategy, with negative gross margins the result.

Screen Shot 2019-10-06 at 10.33.03 AM

Many VCs continue to fund their startups without regard to fundamentals because higher valuations and paper returns enable follow-on funds and increased management fees. As a result, the odds that other investors, particularly in the public markets, will pay a premium for these startups are declining, leaving VCs increasingly with dry powder unable to generate returns. At some point, the limited partners (LPs) are sure to take notice and turn off the taps, pushing valuations back into line.



Why Are Brokerage Companies Slashing Fees for US Trades?

Follow George on Twitter @GeorgeOfARK


Last week, Interactive Brokers introduced a new service called IBKR Lite, eliminating fees on US equity, ETF and option trades. Charles Schwab followed on October 1st, as did TD Ameritrade, E*Trade and LPL Financial soon thereafter. All of their stocks suffered, TD Ameritrade (AMTD) - down 26% - faring the worst. During the second quarter, TD Ameritrade made $320 million from commissions, representing ~22% of total revenues, as shown below. (Note, IBKR Lite is not a part of Interactive Brokers’ base business, suggesting that its zero-fee structure will not have the disproportionate impact suggested by the chart below.)

Screen Shot 2019-10-06 at 10.24.04 AM

Founded in 2013, Robinhood has been a disruptive force in the retail brokerage industry. With an estimated 6 million users today, it has raised ~$900 million in venture capital funding to date and shows no signs of slowing down thanks in large part to its low customer acquisition costs. Reportedly, Square also is introducing stock trading to its Cash App, adding yet another competitive threat to the incumbents.   


While Robinhood offers free stock trading, its revenue base is buttressed by fees from securities lending and selling order flow to high frequency traders. In 2018 Bloomberg reported that Robinhood made ~40% of its revenue from selling its order flow, a controversial practice highlighted in Michael Lewis’s Flashboys. Schwab also provides some of the same ‘execution services’. As zero-fee commissions boost order flows, selling them to high frequency traders could offset some of the lost commissions in this increasingly disrupted part of the financial markets.



Did the SEC Let EOS Off the Hook?

Follow Yassine on Twitter @yassineARK


In June, the SEC announced it was suing Kik for conducting an Initial Coin Offering (ICO) of its Kin token in 2017.  This week, the crackdown continued, as the SEC announced a settlement with, the company behind the EOS blockchain.


The SEC alleges that EOS’s ICO was in violation of the Securities Act of 1933, as it did not register the sale of its $4.1 billion offering. has agreed to a $24 million-dollar penalty, equivalent to 0.6% of total capital raised.


Since the announcement, the community has criticized the SEC heavily. In the past, the SEC insisted that the sale of securities must play by SEC rules or suffer the consequences. Yet, the discrepancy between funds raised and the penalty seems to indicate that not “playing by the rules” makes more sense for entities issuing ICOs.


 As The Block’s Larry Cermak notes, the recent Blockstack offering is a case in point. “Blockstack completed the first SEC-approved token offering, raising $23 million. But Blockstack spent 10 months and $2 million getting SEC approval for the Reg A+ sale. That’s 8.7% of the total raise in contrast to 0.6% that had to pay to the SEC.”


The question is whether or not’s settlement with the SEC establishes precedent. Because it was not the result of a lawsuit but instead an administrative settlement, the answer is not clear.


Molecular Diagnostics Should Make Healthcare Cheaper, Better, and Faster

Follow Simon on Twitter @sbarnettARK


Firms leveraging genomic tests are unlike traditional healthcare companies. In our view, diagnostics powered by genomic sequencing are poised to gain significant share based on their speed, accuracy, and cost-effectiveness.


Historically, prenatal screening, cancer recurrence monitoring, and organ transplantation required dozens of expensive diagnostic tests that delivered imprecise results over long periods of time. Thanks to companies like Invitae (NVTA), Guardant Health (GH), and CareDx (CDNA), cell-free DNA (cfDNA) testing is fixing this diagnostic odyssey. cfDNA testing is non-invasive and provides more accurate, clinically actionable information than traditional diagnostic tests. 


Genomic tests also prevent unnecessary or invasive medical procedures. Veracyte’s Afirma Genomic Classifier, for example, can differentiate malignant from benign thyroid tumors with high precision, preventing thyroid surgeries and the associated lifelong endocrine treatments. Likewise, scouring the body for biomarkers, liquid biopsies can prevent invasive tissue biopsies that often fail to surface enough tissue for decision-making.


Molecular diagnostics also can lower the cost of researching and developing new therapies. By partnering with genetic testing companies, drug developers can discover and enroll patients in clinical trials more efficiently and effectively, which should translate into lower prescription drug costs in the long run.


Looking Past the Headlines Associated with Automation, ARK Takes a Different View 

Follow Sam on Twitter @skorusARK


This week the Federal Reserve Bank of San Francisco published an Economic Letter, “Are Workers Losing to Robots?” Like many reports on automation, the headline suggests a zero-sum game but their conclusions are nuanced and more optimistic.


According to the Federal Reserve of San Francisco, automation does not cause unemployment, but it does reduce the share of income paid out to workers, increasing companies’ returns on capital, as shown below.


Screen Shot 2019-10-06 at 10.37.38 AM

At the same time, given the productivity uplift associated with automation, real wages gains can accelerate even as labor’s share of corporate income declines. Also important to note, productivity is a force against inflation, suggesting increased purchasing power associated with any given level of wages.


So, will workers lose out to robots?  ARK’s take is that they will not.



What Do We Make of Tesla Acquiring DeepScale?

Follow Tasha on Twitter @TashaARK


This week Tesla acquired DeepScale, an AI startup working on perception for autonomous vehicles. DeepScale is creating power efficient deep learning systems.


While the terms of the deal were not disclosed, sources claim that Tesla purchased the firm outright, with Deepscale’s 40 employees as an “aquihire” for its Autopilot team. DeepScale also professes that its technology can enable faster over-the-air (OTA) updates.


This week, Tesla also released Smart Summon, with videos of its missteps and mistakes going viral. Musk tweeted about the 550,000 uses of Smart Summon, suggesting that the data will train and improve the system.


We will continue to follow Tesla Autopilot updates as they make their way to a feature complete package. Stay tuned!

ARK's statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. 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.



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