Transcription
Hello and welcome to the September market update webinar. My name is Dan White, one of ARC's associate portfolio managers, and I will be moderating today's call. This call was pre-recorded on September 11th, 2025. With that, I will now turn it over to ARC CEO and CIO, Kathy Wood. Kathy.
Okay. Thank you, Dan. Uh, and thank you everyone for joining us. Uh well, I'll I'll be very quick today because it does seem like inflation and interest rates are resolving to the downside as we uh expected. Uh and that tariffs, they're working their way through uh and it does appear that businesses are are taking the hit and more than half of the hit. Yes, consumers are seeing higher prices for some goods in particular. uh but businesses are are taking about the last I saw was 54% of the hit. uh and uh we do believe that this the PPI this week uh was important minus0.1 for both headline and core uh and then the CPI which uh also came in uh in line with expectations for the most part with the exception of shelter being higher than expected and we know that uh home prices and rents are starting to fall and that there's going to be a long tale of falling prices because of the big lags in those indices.
Uh the other thing I'd like to focus on is uh valuation uh and valuations have gone up uh in the innovation space generally. Um, but if you take a look at the last time that happened precoid, we have to take out the boom bust associated with COVID. Uh, because we don't think that will ever happen again. Even if there were a a pandemic, uh, we believe that governments have learned the hard way, uh, not to throw money at it. It only causes problems for years afterwards. Uh so we think that was a special case and taking that out if you look at the last time uh relative valuations were at this level uh and that would have been 201617 uh what what we saw in the years following 17 1819 is relative valuations actually fell over those years but the revenue growth and margin expansion associated uh with many companies in the innovation space overwhelmed that valuation compression. And uh as we have been um as we have been illustrating over the last few years uh as we think about valuation, we make that assumption that the valuation of our portfolios is going to compress towards a market multiple over the next five years. We do not depend on valuation uh to get our compound annual rate of return uh expectations. In fact, quite the opposite. Uh we assume we're going to be penalized. And I can tell you uh given our valuation models that the the compound annual rate of return we expect is um is very much in keeping with the minimum 15% hurdle rate of return. in fact uh uh significantly above that.
Uh so with that I will um hand it back to Dan with the thought that we do believe we're in a bull market that is broadening out a a very healthy bull market climbing a wall of worry. There is a lot to worry about um uh wars and uh and even turmoil uh in the US uh along political lines recently. And yet we have this wall of worry. Uh the market climbing this wall of worry and broadening out uh we think uh which is uh very much uh important uh uh uh in in terms of uh the market sustaining this this bull momentum bullish momentum. So with that back to you Dan.
Thank you, Kathy. And listeners, most listeners know if you want uh Kathy's longer in-depth version of that dialogue, please turn over to ARC's YouTube page uh for Cathy's monthly in then the nose series. Um that breaks all that down with charts. Um now we will begin the question and answer portion of today's webinar. Questions were received from our clients, distribution partners, and sent to our funds X and Instagram accounts at ARC_funds. Um Kathy I'm first one's coming back to you kind of a highle question here. It seems like passive index tracking investing only further inflates valuations of the largest companies. What is ARC's view on this phenomenon?
Well, uh we have been talking about this phenomenon particularly in 23 and 24 as the market was hitting all-time highs and it was powered by the largest stocks uh in a very concentrated indices by historical standards. Uh so yes, self-fulfilling prophecy and this is the battle we've been uh fighting from an active management point of view uh for I'm going to say 20 years. Uh really this started after the tech and telecom bust uh and even more so it accelerated and gained momentum. this move towards benchmark sensitivity or passive uh after 08 and ' 09. Uh and so we think the pendulum has swung um far enough, but we thought that a few years ago as well. Um as I mentioned uh in my introduction, the market broadening out here is really important and uh we do think that there's going to be a breakaway uh for innovate in innovation um stocks uh truly technologically enabled disruptive innovation we think is going to start outperforming these indices. Why? It is because some of the largest holdings in the broad-based uh benchmarks are going to be disrupted themselves. Uh many uh many people have been talking about Apple and its inability to get its footing uh in the AI space or in the autonomous mobility space. What is the uh ultimate mobile device? It's an autonomous vehicle and uh Apple had been trying uh to to break into that world uh and I think for the last six seven years and we've seen one turnover after another after another in terms of strategy and management uh teams. Uh so that's a candidate and is a very large part of the index. Uh Google we think is one of the best AI companies in the world. It has some of the best talent in the world from Deep Mind an acquisition uh from the UK uh and and yet uh it is in harm's way from this point of view. It has had a lock on the search market and now there are many more players. Uh Perplexity of course is one. Even Bing uh with OpenAI and M Microsoft is gaining share. Uh now uh Google is also uh combating that but the fact remains it had almost it had roughly 95% plus of the search market and that is changing and even Amazon uh again we love Amazon's positioning in the cloud. We think the cloud is extremely important uh here. Uh you know Oracle's report uh put an exclamation point uh on on that uh and and yet Oracle is could it be a spoiler in this market? We noticed that Amazon's cloud margins uh went down while its revenue growth did accelerate. Uh that's an open question and of course agentic AI uh calls into question whe whether or not we're going to as we are on shopping expeditions uh whether we're going to let our personal uh assistant do the shopping for us or go back to our old habits uh and start with Amazon which historically has been uh the first place many people did start their shopping e expeditions. We don't know. Uh and so the world the very comfortable world that those companies dominated uh is changing and uh we think that there are many other companies that are much quicker, more agile. Uh but as Nick Grus uh our director of research for consumer internet and fintech would say distribution, distribution, distribution. So, we have a live debate uh here at ARC. Our uh Brett Winton, our chief futurist, is uh is somewhat skeptical uh and thinks that there will be more disintermediation uh than many analysts out there expect. So bottom line, we do think the market's going to broaden out here as some of the most important and biggest positions in these benchmarks start to disappoint. Maybe not in a huge way but at the margin. Uh so with that, back to you Dan.
Yeah, thank you Kathy. And just the sheer size of that like passive universe. Everyone thinks the broad benchmarks in general. There are a lot of funds out there that are quasi benchmarker or benchmark hugging that really it doesn't come up in that first initial look. Um so you know that pendulum has swung quite far. The the next question turning to the crypto side here with uh Lorenzo. Um a lot of talk about digital asset treasury companies or DATs. Can you please explain ARC's uh just general thesis here?
Yeah, of course. Um so maybe I I'll give uh um a brief overview. DATs are um companies uh that trade publicly that uh are accumulating as much um Ethereum, Salana or Bitcoin as as possible. And so it really depends on the on the mandate uh that that they have. Um, we've invested in Bitmine. And so, um, as an update on on Bitmine, uh, they, uh, now hold more than 2 million ETH, um on their balance sheet. And I think now they have more, uh, Ethereum than the rest of the top 10 Ethereum DATs. Uh, so they've really pulled away and and hit escape velocity. um they've been able to to increase uh you know to continue to increase the the the ETH per share and so I think in terms of the thesis down uh we think that are interesting uh rappers they are you know for certain assets and specifically uh smart contract layer ones and and even some of the other uh altcoins uh are a more efficient exposure gi given the the yieldbearing uh nature of these assets uh and um the you know the flexibility that you have with these assets to use them onchain to generate potentially more revenue. So that that is the the general thesis. Um if we compare then to to ETF and we've talked about this um for now um staking is not allowed and even if it were we believe uh you know they're going to be able to stake a portion of the of the AUM and so it will be from a revenue perspective and yield an inferior product. Um so so that really is the thesis. I think overall what we've seen uh you know in the first two months um mnavs have really compressed right like in the in the in the past uh weeks uh a lot of these dats are trading now between one xm nnav and 1.1 1.2 too. And so I think the the first phase was really to um to leverage the ATMs uh and be able to increase the Ether Salana or Bitcoin per share. Uh I think perhaps now we're really looking at the market with some compression on the MNAV and so perhaps we're hitting um a second phase where they'll you know they'll need uh perhaps to repurchase the shares which we've seen when you know with ESBED and a couple of other debts or perhaps tap into the debt market or convertible and so we're uh yeah we're actively monitoring uh the um the situation in the space. Uh I think one interesting point uh also for Bidmine they've um they've just invested uh $20 million into ATO which is the uh digital asset treasury that uh is accumulating worldcoin tokens and so they they uh own about 13.7 million shares of of the debt and I think Tom has said that they want to allocate about 1% of their balance sheet to uh Ethereum ecosystem opportunities. Uh so that would be either DAS or perhaps underlying tokens and so um that really has been the the first investment uh the first investment from uh um from BitMine and so um yeah I think we're very much entering into um a more mature phase and we'll see you know how um how these uh companies evolved and how they're able to to leverage you know capital markets in in different ways.
Yes. And uh Lorenzo uh just in terms of why we uh bought uh Bit Mine immersion in the first place, it was very difficult to gain a towhold in ether uh uh through staked ETFs and we we had to resort to the Canadian ETFs uh because the US at least so far does not allow staking uh in ETFs. And uh so this was a solution this DAT bit mine immersion uh for ether was a solution to that problem. We think that uh the Ethereum protocol is where most of the DeFi or decentralized financial revolution uh is taking place. And uh Lorenzo, I know that Bitmine's original goal was uh to uh to um uh to increase its position to 5% of total uh ETH outstanding. So where are we now relative to that goal?
Yeah, so I think they're a third they have over 2 million uh ETH right now. And so, um, again, they've been able to increase the the ETH per share really, uh, really rapidly. And so, uh, if you look at the total supply, uh, Kathy of, uh, Ethereum, it's 120, uh, 120 million. So, 5% would be 6 million ETH. And so, Bitmine has a bit more than 2 million. So, it's about one-third there. Uh, which, you know, they've been able to do that uh, very, very rapidly.
Thanks, Lorenzo. And staying on ETH here, the next question is what's ARC's uh Ether price target?
Yeah, maybe I can I can talk a bit uh more uh generally about the the ETH uh thesis um than the the price target. Um we've seen a lot of um of institutions um uh now Robin Hood and and many others build on Ethereum. And so if you look at um we think the biggest uh trends and uh in the in the next uh you know five years tokenization rwas stable coin and defi in general uh ethereum is still very much the the leader um you have about you know 120 billion of uh total value locked which is really a value that are locked on smart contracts on Ethereum and and layer twos um more than 100 billion in stable coins uh on Ethereum out of a total of 280 more or less. And so we really think um you know DeFi and a lot of these trends are being built uh on uh Ethereum and its layer twos. It definitely has you know liquidity uh liquidity modes. A lot of the D5 apps you know a and others uh have uh are really you know at least an order of magnitude bigger than on on other L1's and we do think they're you know very interesting um opportunities. We think Salena is going to be very interesting as well. Um but if you look at you know Ether the the asset um we think it's you know a very unique asset. It's yield bearing so it's a revenue gener generating asset. We we'll publish more more research uh um on that right because as an ETH holder if you stake um you get yield that comes from the fees that users on on pay are paying on chain. So it's it's revenue generating. Uh Ethereum is used also as collateral on in DeFi. If you if you look at the number one collateral in DeFi and layer and layer 2s, uh it's it's Ethereum. So putting Ethereum as collateral, taking uh stable coins as um as as debt. Uh and then it's also a medium of exchange, right? um I think less popular now uh probably but uh if you look at NFT marketplaces and and paying fees really on on Ethereum paying for transactions you need Ethereum right you need to pay uh for for those fees um with with the Ether token and so looking for in the next you know five years um we think the the road map of scaling the layer one and the layer twos which I think you know a lot of the teams are focused on that if you look at base and and other chains I think will allow for more more users uh to come on chain. Um and so yeah, again I I think we um were eager to publish uh more research and be more specific on the the Ethereum price target. But to give you an idea, right now um Ethereum is about 13% of the the total um market cap of of crypto accounting everything. uh and we have a market value in 2030 of 25 trillion. And so that that gives you um a bit of an idea, I think, of the you know, the expected um uh final uh Ethereum market cap uh in in 2030. But again, stay tuned for for more more research on on that.
Great. Thank you both. Looking forward to that uh publication. I think I think many of us are uh changing gears here a bit uh to the public equity side. So Sam um how do you react when you hear critics say Tesla has an excessive dependency on its CEO Elon Musk?
I mean I would say if you're going to have an ex excessive dependence on anyone Elon's the guy you want uh to be dependent on with all of his execution. And you know, typically typically what we've said in the past, and I think this is evolving, is that really getting robo taxi across the finish line is critical for Elon's involvement. Uh, and then, you know, a lot of things can happen. He could probably step back from the role he's currently in and focus on other things. But I think what we're seeing and it's good that this new incentive package is in place to align him for the long term. But Elon uh has a history of taking all of his chips, putting them back on the table to achieve an even greater goal. And I think what we're seeing and and hearing here is, you know, robo taxi is a huge opportunity, right? 10 trillion dollar opportunity on that order. Um but then after that there's a even bigger opportunity with humanoid robots. Uh and I think it's becoming very clear that you know Elon doesn't want to just run an insanely profitable robo taxi business. He wants to fundamentally change how the economy works with abundant labor. And so I think this incentive package is super important. I think we're going to see Elon uh achieve robo taxi and scale that out and then put the chips back on the table to try and tackle the humanoid robot problem.
Thank you, Sam. Certainly critical for a lot of ARC's thesis of that productivity boost to real GDP and growing out of uh the US's deficit. I know Kathy's talked about that a few times. Um the next question we have Nick. He's uh he's been at the Robin Hood Summit this week. And so uh Nick, Robin Hood has had stellar performance this year. Um what is your vision for the company long-term? And maybe some what are the interesting facts you've heard this week?
Yeah, thank you Dan. This is a a great question and you know we're really excited about um the strides that Robin Hood is making as a company and I think if you look at the performance of this year in the name um I think it really does boil down to product velocity and that's something even the company itself would say um we were actually just at is as you mentioned the Robin Hood Summit event um which is their third event of the year product event of the year um and they're actually having a fourth um around AI in December. Um, and I think when you when you look at it from a product velocity perspective, you can really understand that Robin Hood is separating itself from the traditional financial services space. It's very rare to see a company launch this many products in one year, let alone continue to commit to launching more products um, in this space at this pace. Um, and if you look at what they're releasing, Robin Hood started as a commission-free brokerage exchange, but I think the long-term vision here is really building out a financial operating system. And so, if you go back to the gold event earlier in the year, uh, Vlad, the CEO, talked about the idea that there is a great wealth transfer happening, um currently and will continue to happen over the next decade to two decades. And we're talking about $125 trillion worth of wealth transferring from the baby boomer generation down to millennials and Gen Z. And Robin Hood wants to be the operating system, the financial operating system that is able to take on all of that wealth um for these individuals. And I think they're sitting in pole position. Um if you look at Robin Hood as a brokerage account, it really is the premier brokerage account in the US for the millennial and Gen Z generation. And now if you look going back to my prior comments around product velocity, what they're launching is very specific to building out more financial services. So they talked at their gold event earlier this year about banking products. They released um an AI uh call it concurge and and research management tool in Robin Hood Cortex. Um, now they're they're building out more active trader um um um products, which is what we were uh just at at the Robin Hood Summit event. And then also they're building out a social feature. So being able to um build a community around the trading um the active traders and just the the trading environment that they have on Robin Hood and being able to keep that engagement on platform. So you look at this company and they're really going after so many different areas. Um but I think the vision is very cohesive right you can sometimes maybe get worried that a company's going after too much at one time but I think if you look at the execution of this management team and you understand the long-term vision which is building this financial operating system being the banking app being the brokerage app for this next generation this current generation and millennial and gen z's um this is a really important story and one that you know we're actually currently working on uh putting putting together research. So, look out for a blog around this very specific topic. It's really our our new thesis around the digital wallet space. Um, because of what we're seeing with Robin Hood and this company really beginning to adopt this idea of an everything app. I called it a financial operating system, but being able to attack this space um at a velocity that really is unparalleled in the financial services space. One thing we actually kept hearing at the conference over and over again from management was we don't view ourselves as a as a fintech. Uh we we believe we're at at our core a technology company operating in the financial services space. And I think that really speaks volumes about this company and the long-term trajectory of what they're going after. So I'll pass it back to you Dan.
Thank you Nick. Uh next question we have Frank. Um so Frank, what is your view on Palunteer's current valuation?
Yeah, sure. Um our thesis on Palunteer really centers around their positioning as the platform for enabling AI use cases at scale. Uh and I think I think you see that in their numbers kind of across the board. Their their topline revenue accelerated to 40% uh overall growth this quarter. Their US business is on fire on the commercial segment. Uh so enterprise software they're growing 93% year-on-year and that was an acceleration from 71% year-on-year growth last year. Uh and if you translate that relative to uh their valuation in the market, they're for sure priced at a premium. If you look on a a price to next 12-month sales, they're trading around 75 times. The next closest cloud software company is Cloudflare trading at 30 times. But I think if you just look at that kind of price to sales number which is used uh commonly for software companies because not all of them are profitable uh it really understates the profitability of of Palunteer's business where they had a 70 a 57% free cash flow margin in the most recent quarter. Uh and if you look over the last 12 months they're at a 10% a 50% free cash flow margin versus Cloudflare's 10%. So five times more uh free cash flow for every dollar of revenue that uh Palunteer brings in. And I think you have to also think of that as uh they in the context of Palunteer's businesses accelerating because of their position in this growing AI opportunity. Well, a lot of enterprise software companies uh in their peer group are still decelerating. I think we did see uh certain green shoots of the market broadening out which is really good this quarter. Uh Snowflake and MongoDB is an example of that. Uh but the the the impact it's had on Palunteer's business I don't think can be understated. And so we we really think they're in rare territory in terms of strategic positioning, the fundamentals of the business uh and the valuation. And I think we we take all of those into account when we're positioning uh this name in our portfolios. So if you followed our positions and strategies like ArkK or ARKW as Palanteer has uh really grown faster than the rest of its software peers and appreciated in the market, we've taken considerable amounts of profits. uh but still balancing that with our conviction in the name kept it generally around the top 10 uh because of of the magnitude of the opportunity and and also I'll say you know you can you can look at our big ideas reports to see the the size of the AI opportunity that we think is to come and we think the platform layer where platform uh where Palanteer sits is the most important layer and Palanteer is best positioned there
right and and we should uh add from a portfolio management point of view I think If uh if uh Palanteer's valuation was not at this level, it would it would be right at the top of our portfolio with uh with Tesla. Uh that is how high our confidence is in uh that premier platform as a service opportunity.
Certainly. Thank thank you Kathy and Frank. And Frank staying in your coverage universe here. Um could you please provide an update on your core investment thesis?
Sure. Yeah. Coreweee is the leading AI neocloud which a neocloud is essentially a a new cloud competing against the say big four now with uh Amazon, Microsoft, Google and Oracle. Uh and they're they're typically and corewave especially built uh AI native from the ground up. So, so, so building their facilities focused on accelerated computing and core's clients include Microsoft OpenAI uh and Meta as examples of some of their largest uh and their um the demand for compute I think you can see in the market whether it's Nvidia's sales or Oracle's earnings that just came out uh is only growing and that's driven by companies like OpenAI and Palunteer that are that are really bringing AI to market at a at a at an increasingly large scale. uh their revenue grew 200% plus in the most recent quarter. If you listen to Nvidia's call, Jetson Huang is talking about uh performance per watt or tokens per watt. Uh because companies like OpenAI uh for for their API products charge on a per token basis. The more tokens per watt and the more total watts you have, the more revenue the business can generate. And so if you look at that what that means for core they have 470 megawws of power deployed right now and they have contracted power of 2.2 gawatts and are continuously looking to expand that. So if you just look at 470 megawatts to 2.2 you can see that you know on the same price per token per watt basis they could 4x the the revenue base based on what they already have contracted. Um and and Nvidia ha uh coreweave has a strong relationship with Nvidia who's incentivized not only because they're an equity investor in coreweave and supported them in their IPO uh but because coreweave is more or less allin on Nvidia's infrastructure stack. So Nvidia's largest customers are these big clouds and they're seeing them all work on their own custom silicon efforts whether it's Google with the TPU or Amazon with tranium uh and having an alternative option like a core uh that can be uh a new source of demand and and leveraging uh bargaining power against the clouds uh is is very strategic for Nvidia to to invest in and give corewave good allocations. um outside of kind of this core infrastructure as a service and building uh really the the the infrastructure to support um the largest companies uh they're also uh looking forward strategically into the platform layer that we just talked about with Palunteer and they acquired a company called Weights and Biases which is you know uh tools and services for for AI developers to to build and train models that gives them a great top offunnel lead genen and really broadens out the customer base beyond just these you know largest top five to 10 clients in the AI space.
Great. Thank you, Frank. Uh this this next and final question is is a a follow-on question actually from a few months back. So the to the genome team um previously we had talked about deregulation in the health care space. Um could you please provide an update on that?
Sure, thank you for the question. And uh so let me focus then on some of the biggest changes which are coming out of the US food and drug administration or the FDA. So at a high level here we've seen a clear shift in stance with the FDA commissioner Dr. Marty Mari and the health and human services secretary uh Robert FK Chenn Kennedy Jr. and they've been really vocal in acknowledging and committing to addressing the roadblocks in the regulatory process. So this includes rigid and costly regulatory barriers that slow innovation and push development overseas. So we are still facing increasing clinical development costs and a 90% clinical trial fail failure rate. So there's really an important need to tackle this. So the FDA is proposing several forward-looking reforms and this includes building deeper partnerships with industry with a goal to reduce regulatory uncertainty. Also enhancing regulatory efficiency and productivity by leveraging tools like AI, piloting uh alternative trial and study designs that are better suited to the diseases being studied and introducing new approval pathways especially for rare disease therapies or even an N of one approval pathway for bespoke personalized therapies. Certainly following the success that we saw with baby KJ who had a metabolic disorder and a custom uh gene editing therapy was developed for him in a little under six months. Another relevant example here is faster reviews for national priorities. So there's a new national priority voucher voucher program that they'll be launching and this will allow review times to finish in 1 to two months instead of 10 to 12 months and these will be for medicines that are addressing diseases and conditions of high burden here in the US. Another dynamic I would highlight here is a push toward more predictive drug development. And so the FDA is actively encouraging nextgen approaches to reduce reliance on lengthy expensive animal testing by encouraging more predictive pre-clinical methods. This includes AI, multiomics, microfysiological systems like organs on chips and other nextgen technologies that could accelerate time to market, significantly lower development costs and improve R&D returns. And this could especially benefit companies that are already leveraging these tools. And I would sum here really that the FDA is actively pivoting toward a more innovationfriendly paradigm, embracing faster approvals, flexible trial formats, and really encouraging more predictive pre-clinical models. And this direction really aligns closely with ARC's long-term themes and multiomics.
Yeah. And I'll just add uh one last uh exclamation point. Thank you, Shay. Um this is a a recording uh but as of the day of the recording Tempest received uh US FDA special 510k clearance for its updated tempo tempest pixel device. Uh and this is an AI powered cardiac imaging platform. Uh so Tempest is really uh distinguishing itself we believe in this convergence between um AI sequencing technologies and a diagnostic. We know that the large pharma and biotech companies are facing I think it's a $300 billion hole in their revenues during the next five years as uh their patents expire. Uh so they are going to and we're we're beginning to see them embrace uh some of these new technologies because they know they have a problem and they may also be targeting some of our companies to help them fill in their holes, their revenue holes. Now, we don't want our companies to be taken out, but what we do want is strategic price discovery out there. And the M&A uh environment has uh picked back up and we are beginning to see a lot of M&A in this space uh that is uh justifying uh our positioning in this space.
Certainly, thank you both. And uh that will that will conclude today's webinar. We will briefly show performance statistics that can be found on arc-funds.com. Thank you to everyone who listened today to today's call and of course thank you again to the entire ARC