Summary
ARK Innovation ETF continues its major consolidation phase amid its recovering momentum.
Its largest holdings are mostly rated well for their respective momentum.
We discuss whether investors should add ARKK now.
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Cindy Ord/Getty Images Entertainment Investment Thesis
ARK Innovation ETF ( ARKK ) is the premier fund of Ark Investment Management. Unfortunately, CEO/CIO Cathie Wood’s flagship ETF has taken a significant amount of flak in 2021. It is despite posting phenomenal returns over the last five years. As the fund size gets larger over time, some investors begin to consider whether Wood would still outperform moving forward.
Bond yields and persistent inflation concerns have also not helped matters. Bloomberg reported recently that despite Tesla stock’s ( TSLA ) remarkable recovery in H2’21 2021, ARKK is still down for the year. It added that ” since early August, 34 of ARKK’s 46 holdings have fallen , with losses in Roku Inc. and Zoom Video Communications Inc. weighing heavily on the ETF’s performance, according to Bloomberg data. To make matters worse, Wood’s funds have also been offloading shares of [Tesla] over the past few months.”
ARKK continues to come under fire for its poor performance in 2021. We discuss whether the ETF is still a buy for growth investors. ARKK ETF YTD Performance
ARKK YTD performance (as of 29 October 21). ARKK 3Y performance (as of 29 October 21).
Cathie Wood’s flagship fund has had a year to forget. Its YTD return of -8.8% has substantially underperformed the SPDR S&P 500 ETF ( SPY ) and Invesco QQQ ETF ( QQQ ). The SPY and QQQ were up 24.5% and 24.7% YTD, respectively. Moreover, ARKK’s largest holding, Tesla stock, is also up 68.3% for the year. Therefore, investors who wanted to gain exposure to Tesla stock through ARKK have not been rewarded so far.
Notwithstanding, ARKK’s performance over a 3Y horizon has still been outstanding. In addition, it should also remind investors that they should not expect ARKK’s returns to mirror Tesla stock’s performance through ARKK. After all, Tesla accounted for just 11.2% of the fund’s holdings on 29 October 21. ARKK is Not For Value Investors
ARKK top 5 holdings (as of 29 October 21). Source: Koyfin ARKK top 5 holdings EV/NTM Revenue multiple Vs. peers/industry. Data source: S&P Capital IQ
Some investors often bemoaned that ARKK’s stocks are “overvalued.” If we observe the valuation multiples of their top holdings, it may seem to be the case. Their top holdings all look way “overvalued” as compared to their peers/industry. Despite that, Tesla has returned 1,583% to its investors over the last three years. It has also outperformed the SPY and QQQ “hands-down.” ARKK doesn’t invest in typical value plays, as it’s a growth and momentum ETF. Therefore, looking at its peers’ valuations may not be a useful touchstone. Tesla stock EV/NTM Revenue 10Y mean.
If we consider Tesla stock’s 10Y NTM revenue multiple mean of 5.5x, it’s even higher than the industry’s current mean of 2.4x. The market has been willing to ascribe Tesla stock a much higher valuation for many reasons. First, some investors like the potential platform opportunity which Tesla is leading. Second, many investors feel that the company’s software advantage has often been underappreciated. Yet, some investors believe that the company should be valued as a disruptive technology company and not a typical automaker like its peers. As a result, Tesla’s valuation has surged higher over the last ten years. It doesn’t matter whether you like it or not. It depends on how the market is willing to value Tesla. Moreover, it has already returned more than 1,500% returns to investors over the last three years. Talk about the margin of safety for these investors.
Therefore, value investors should stay away from ARKK, as they will never be able to appreciate these stocks. ARKK Invests in the Best Emerging Leaders
If investors pore through the markets that their top holdings operate in, it should be evident that these are all emerging leaders in their respective markets. There’s little doubt that Tesla is the electric vehicles (EV) market leader. We explained in a recent Tesla article that the company has already exceeded 1M in annualized production. Tesla is also expecting more intense competition moving forward. But, the current chip supply crunch also demonstrated how understated its software capability is. While the legacy automakers […]
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