#213: COVID-19 and Innovation, Bitcoin, Fintech, & Rare Disease

The coronavirus crisis is precipitating the largest work-from-home experiment in history. Tech companies, universities, and governments are sending employees, staff, and students home to prevent infections and to work or study.

Working and studying from home requires software that works anywhere and enables collaboration. Companies like Salesforce, Workday, and Google have been pushing cloud software for more than a decade. Almost overnight, it has gone from nice-to-have to mission-critical.

Video conferencing company Zoom has been one of the notable beneficiaries of this virus. In recent weeks, usage and free trials have ticked up, with significant interest from China, a market that historically has shunned western SaaS products. During the past month, as the stock market has dropped, Zoom has gained 19%.¹

Team communication software, Slack, also has attracted a “massive outpouring of interest”, especially from countries impacted by the coronavirus. With an easy to access free tier, it has seen an uptick in new signups and team creations, boding well for conversions to paid customers in the future.

For most software companies, the near-term impact probably will be negative. Both Slack and Adobe lowered guidance for the second quarter, citing greater uncertainty, travel restrictions, and lower odds that deals close.

While the coronavirus should accelerate the adoption of cloud software in the long term, valuations in the near term have compressed and could continue to compress until this risk-off period abates.

[1] Information derived from third party data source.

For years, live sports have held the Pay-TV market together, but now that concerns about the coronavirus have forced the cancellation of collegiate and professional sporting events, online gaming is likely to pick up a lot of the slack. Sports fans might find that live-game streaming services like Twitch or Mixer are interesting, if not perfect, substitutes.

We believe live streaming gameplay is one of the hottest trends in the video gaming space. Since 2013 Twitch viewership has grown at 36.5% annually, with more than 11 billion hours viewed last year alone.

On Wednesday evening, President Trump addressed the nation with the government’s response to the coronavirus (COVID-19). He proposed a number of initiatives including $50 billion for Small Business Administration (SBA) loans. The SBA sets guidelines for loans which ultimately are originated by partners, such as banks and community development organizations. To reduce the risk of making loans, the SBA guarantees up to 85% of each loan, enabling its partners to consider loan applicants they otherwise would not.

In our view, the SBA and alternative lenders such as PayPal, Stripe, Shopify and Square should work together to disburse loans. In 2019, Square facilitated 330,000 loans totaling $2.3 billion compared to the SBA’s 58,000 loans totaling $28 billion. In other words, the SBA loaned more than $450,000 on average to each business compared to Square’s $7,000, suggesting that Square is servicing many more truly small businesses. Moreover, Square can facilitate loans in 1-2 days compared to 2-3 weeks it takes the SBA.

By working together, the SBA and alternative lenders could disburse loans more effectively and efficiently to small businesses impacted adversely by the fallout from COVID-19.

This week, Matternet announced that it had developed a drone station to facilitate the delivery of medical specimens on hospital campuses. Available to hospitals on a subscription basis, Matternet allows drones to land and deliver payloads of diagnostics, pathology specimens, and medicine, while swapping out their batteries for return trips.

Matternet is partnering with Swiss Post in Switzerland and UPS in the US. Last October, UPS and Matternet received FAA approval to conduct some flights beyond visual line of sight, a critical step in enabling cost effective drone deliveries. As a result, one of their trial partners, WakeMed, has seen much faster and more predictable specimen deliveries. ARK estimates that, regulation permitting, drones will be able to deliver packages within 10 miles for just 25 cents, orders of magnitude cheaper than courier services.

Now that the COVID-19 crisis has spurred demand for contactless delivery, the adoption of delivery drones could accelerate. Regulators could step up their approval for certain use cases to facilitate rapid delivery solutions, especially now that self- quarantines will reduce the risk associated with flying above pedestrians. South Korea and China have been using drones to spray disinfectant and deliver medical samples and supplies.

On Thursday, bitcoin experienced the second largest one-day price drawdown in its 10-year history. In fewer than 15 minutes, it fell from $7,200 to less than $5,400, breaking its 200-week moving average (WMA) decisively for the first time in roughly 7 years as it sank to $3,800, down nearly 40% in just hours.

The severity of the selloff eclipsed all others except the 49% drawdown in April 2013.

The largest contributor to the selloff appeared to be bitcoin liquidations to satisfy margin calls on derivative exchanges allowing up to 100 times leverage. Bitmex, the largest crypto derivatives exchange, saw more than $700 million in liquidations of its bitcoin perpetual swap, the most over a 24 hour period in 16 months.

As bitcoin’s price crashed, the price of ether (ETH), the second largest cryptocurrency by network value, also experienced its largest daily selloff, down 43%. The severity of the selloff led to an unforeseen liquidity crunch in MakerDAO’s Keepers market, resulting in the involuntary liquidation of $4.5 million worth of collateralized debt positions (CDPs). 

As of this writing, both the price of bitcoin and ether have recovered, bitcoin up 47% from its low and hovering just above the 200 WMA.  We believe that crypto hedge funds and traders have more to learn about both the downside price spirals and the volatility associated with massive leverage in this nascent market.

Our previous analysis of Google Trends data has indicated that Cash App is highly popular in the south where unbanked rates are high. Square CEO Jack Dorsey also has alluded to this phenomenon.

We believe that what many analysts fail to understand is that Google Trends data is relative in scale and does not capture Cash App’s progress on an absolute basis. As can be seen in the chart below, Mississippi scores highest on Google Trends’ relative scale even though its population is below 3 million. Large states like Texas and New York score much lower on this basis.

The picture changes when controlling for state populations, as shown below. According to our analysis, a large portion of Cash App’s customer acquisition could be moving toward Texas, Florida, California and New York, states with much larger populations than Mississippi and Louisiana. We will explain these and other findings in more detail in a forthcoming blog post.

Invitae (NVTA) recently announced that it is acquiring three companies: Diploid, Genelex, and YouScript. In our view, these acquisitions, respectively, will strengthen Invitae’s ability to diagnose rare diseases, conduct pharmacogenetic testing, and to improve clinical decision making. ARK believes Invitae will unlock latent demand with lower pricing, more comprehensive testing, and an easier order entry system. Its investments, both internal and external, also should lower cost-of-goods-sold (COGS) and translate into sustainable operating cash flows as it scales.

Roughly 4% of children are born with a rare genetic disease. Traditionally, it has taken five to seven years to reach a diagnosis. Consequently, nearly a third of these children haven’t survived past the age of five years. In contrast, thanks to genetic sequencing and symptom data, Diploid’s AI platform, Moon, identifies rare disease-causing mutations in a matter of minutes. Through its vertical integration, proprietary variant interpretation system (Sherloc), and now Moon, Invitae should be able to widen access to comprehensive genetic testing in neonatal and pediatric health care settings.

Genelex and YouScript enable Invitae to conduct pharmacogenomic (PGx) testing and to support patients throughout therapy. PGx testing has not been adopted widely because of logistics and prohibitive costs. Genelex offers PGx testing and analytic services to be embedded within Invitae’s variant interpretation system. YouScript offers clinicians support tools for PGx testing from information that already is embedded electronic health records at Cerner (CERN), Allscripts (MDRX), Epic, and other health care vendors. Once they are integrated into its platform, Invitae should avoid the logistical and cost burdens that have plagued PGx testing systems historically.