Want to know Cathie Wood’s ARK Invest secret to scoring huge gains? An obscure measure called Wright’s Law, which tells her stocks are not in a bubble.
“Our research is centered around Wright’s Law,” Cathie Wood told a group of investors Wednesday at the Morningstar Investment Conference. “It basically says for every cumulative doubling of the number of units (of a product) produced … costs associated with new technologies decline at a consistent percentage rate.”
Why does this matter so much to legendary investor Wood, head of the successful ARK Invest family of ETFs? It’s that math that makes Wood see shares of electric-car maker Tesla (TSLA) as a bargain. She says Wright’s Law foretells that the cost of battery pack technology, the top expense when building electric cars, will drop 28% for every cumulative doubling of units sold.
And here’s the mic drop. “We believe the average electric-vehicle price will drop below that of the average gas-powered price in the next year or so and will continue to decline,” Wood said. Meanwhile, she said the number of electric vehicles sold, 2.2 million last year, will hit 40 million, or half of all car sales, in 2025.
What Is Wright’s Law?
Many tech stock investors know of Moore’s Law. That rule says the number of transistors in circuits doubles every two years.
But Wright’s Law, brainchild of Theodore Wright in 1936, looks at the cost side of exponential innovation. He came up with the idea at the time of aerospace innovation. When demand for a new product takes off, costs plummet. And that allows for a profit and stock-price-gain bonanza.
And that’s the key to Wood’s faith that Tesla stock still has plenty of upside. “Tesla is riding that down the cost curve of the consumer electronics industry,” she said.
What Wright’s Law Means For Cathie Wood’s Tesla Holdings
To be sure, Tesla is one of the S&P 500 stocks that is holding up best during the September sell-off. Shares of Tesla are up more than 6% in the past 30 days, while the S&P 500 is down nearly 2%. Wood’s ARK Invest owns more than 5.4 million shares, one of its top positions, and making ARK the 17th-largest owner of the company, says S&P Global Market Intelligence.
Additionally, Wood thinks Wright’s Law will also yield huge cost savings in DNA sequencing, robotics, energy storage, artificial intelligence and blockchain technology. With the doubling of units, DNA sequencing costs drop 40%, robotic costs fall 58% and AI training costs fall 68%. Factoring all this in, Wood’s long-term growth expectation is 30% a year.
ARK Invest’s flagship ARK Innovation ETF (ARKK) is down roughly 5% this year so far. That lags the S&P 500’s 17% rise. However, ARK Innovation is up a blistering 440% over the past five years, blowing away the S&P 500’s 103% rise in that time.
“Now we’re on the cusp of transformations to every sector globally — the likes of which we have not seen since the early 1900s,” Wood said. “We are not in a bubble. That I know.”
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
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