State of the ARKK: Should You Invest in ARK Innovation ETF?

By Kirsteen Mackay

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The ARK Innovation ETF (NYSEARCA: ARKK) soared over 144% in 2020 and collapsed in 2021. Is this a good investment in 2022?

ARK Innovation ETF (NYSEARCA: ARKK) has collapsed over 26% in 2021. The widely followed flagship fund of Cathie Wood was a star performer in 2020 but has lost its way this year. It still has a massive loyal following, so is it worth getting onboard in 2022? Let's take a look under the hood.

Disruptive innovation or opportunistic deceit

The phrase 'Disruptive innovation' has become synonymous with Cathie Wood's ARK Invest funds. Her focus is investing in little-known stocks with blue-sky potential.

Not in a dart-throwing monkey fashion but in a strategically researched discovery process.

ARKs team of analysts screen for the companies opening the doors to profit from opportunities in the sectors hot for disruption.

In theory, an exchange-traded fund (ETF) should take the hard work out of investing and give investors access to a handpicked selection of stocks these professionals believe in. It should also reduce investment risk.

A year ago, Cathie Wood was a hero who could do no wrong as ARK Invest stocks soared. Fast forward to today, and her integrity is being questioned as those same stock picks have fallen out of favor.

So, what's the problem? Well, there may be no problem in the long run, but that's where investor views conflict. When a strategy appears to have run its course, investors begin to question it. And that's precisely what's been happening with ARK over the past 12 months.

ARK Invest's Big Ideas

ARK's shrewd team of biotech and finance experts have all the tools and knowledge at their fingertips to seek out the growth areas of the future. And with the utmost conviction, Cathie Wood believes these revolutionary breakthroughs underpin the future of our modern world.

ARK's overarching investment themes include Industrial Innovation, Next Generation Internet, FinTech, and the Genomic Revolution. Within this come the common trends of artificial intelligence, DNA sequencing, 3D printing, robotics, self-driving cars, energy storage and blockchain technology.

Cathie founded ARK to focus solely on disruptive innovation while opening up her research to lead a 'sharing economy' in the asset management space.

In a highly unusual move, the company shares its daily stock trades publicly, allowing investors to see exactly what it's doing. This transparency has helped propel its popularity while also opening it up to intense criticism and scrutiny.

In 2020, interest in buying shares in ARK's ETFs exploded. Indeed, ARK Invest went from Assets Under Management (AUM) of $3.2bn in early 2020 to $34.5bn a year later. And today, ARK Invest has AUM of $42.4bn.

That's a 1,224% rise in under two years.

So, what does this mean? It means Cathie Wood is a very rich woman. According to Forbes, the founder and chief is worth around 2% of ARK's assets under management. That would currently equate to $844m.

Investing in innovation

You may think investing in innovation is a no-brainer? Of course, it is. Why would you bet against future progress? The trouble is innovating takes trial and error, so while the Big Ideas may well be the way of the future, the stocks ARK is investing in cannot possibly guarantee to be the outright winners on this journey to innovate.

Indeed, a quest for transformation requires patience, time and repeated hits and misses along the way. So, although many of ARK's high conviction bets may well go on to become the future hot shots of the next industrial revolution, many more will fall by the wayside.

On the flip side, that alone is a key reason to go all-in on ARK Invest funds and avoid the pitfalls of trying to pick and invest in individual stocks by yourself.

While many of these are solid companies with a clear path ahead, the unfortunate position investors find themselves in is that these stocks may now be overvalued.

Due to investing in the business's future potential rather than the current reality, some of these stocks have turned into highly speculative investments trading far above fair value. Indeed, analysts have slashed their price targets on many of ARK's holdings in recent months.

Let's take a look at ARK Invest's high conviction stocks and how their future looks heading into 2022.

Top 15 holdings of ARKK:

Tesla (NASDAQ: TSLA)

First and foremost, ARK's main conviction stock is EV maker Tesla. With its controversial founder Elon Musk just being crowned TIME's 'person of the year,' it's clear he's doing something right. Tesla is a polarising stock at the best of times, so for ARK to have this as its main asset, it's no wonder it comes under fire. Tesla has repeatedly surprised to the upside and its share price is up 27% in 2021. Its supporters believe it will continue to rise next year but many disagree.

Coinbase (NYSE: COIN)

Coinbase is a cryptocurrency exchange, and as one of the first to go public, it's enjoyed considerable retail investor interest. Nevertheless, it's courted its fair share of controversy and fluctuates in time with the popularity of Bitcoin and other cryptocurrencies.

Unity Software (NYSE: U)

Unity is a Danish video game software development company based in San Francisco. As Unity is an early entrant into the metaverse space, its appeal is golden to those sold on the idea of Web 3.0. Along with AR/VR, AI, RT3D, and Digital Twins, investment in this space is accelerating. Unity has already made impressive headway with its emerging AR content. It has a 90% share of Microsoft's (NASDAQ: MSFT) HoloLens and 90% of Samsung Gear's VR content. After its share price more than doubled between March and November 2021, Unity stock took a big tumble and is down 33% from its November high.

Teladoc Health (NYSE: TDOC)

Teladoc offers patients a virtual link to their doctor, from waiting room to clinic. The telemedicine idea has been circulating for several years but underwent rapid adoption in the wake of COVID-19. TDOC stock enjoyed great hype and speculation during 2020, soaring 260% to surpass $300 a share in February 2021. Since then, it's fallen back to around $90.

Shopify (NYSE: SHOP)

Shopify powers e-commerce sites all over the web. Over the past decade, it has transformed the way small businesses transition online. Thanks to Shopify, anyone can build a professional e-commerce website quickly and affordably. The Canadian multinational e-commerce company powers online stores globally and retail point-of-sale systems. Interestingly Shopify Gross Merchandise Volume (GMV) from social channels is increasing at several times the rate of other online channels. It took 15 years for Shopify's merchant GMV to reach $200bn and only 16-months (from June 2020 to October 2021) to double to $400bn.

Block (NYSE: SQ)

Jack Dorsey's digital payments company, formerly known as Square, has seen its share price fall 23% in the past year. This is another highly volatile stock that has been up and down like a yoyo after soaring over 800% during 2020.

Roku (NASDAQ: ROKU)

Digital media player manufacturer Roku has seen its share price lose more than half its value since July 2021. Roku sells low-margin hardware to broaden its access to a user base it can then advertise to. Its platform segment has a 65% gross profit margin from which it generates revenues through short-form video adverts. It also makes money from other types of advertising.

UiPath (NYSE: PATH)

UiPath makes software for robotic process automation. The stock is down 39% since its IPO in April. However, the business is growing, and the pandemic is opening doors for this trend to continue. UiPath is helping companies automate their workflow, which is proving popular as employees fall sick or isolate.

Spotify Technology (NYSE: SPOT)

Music streaming sensation Spotify is another highly volatile stock, down 29% in the past year. Nevertheless, it continues to be the world leader in music streaming. It's also home to the popular Joe Rogan Experience podcast among many premium offerings. Spotify has something for all the family and is increasing its revenue streams via in-content advertising and a venture into audiobooks.

Exact Sciences (NASDAQ: EXAS)

Exact Sciences is a molecular diagnostics company specializing in detecting early-stage cancers. Since February, the EXAS share price has lost half its value. Its partnership with Pfizer (NYSE: PFE) recently ended. This could mark a new beginning for the stock or potential doom, depending on your point of view.

Intellia Therapeutics (NASDAQ: NTLA)

Intellia Therapeutics saw its share price take an almighty leap in July but has since coasted along without much enthusiasm. It's down 28% from its September high. Intellia is exploring CRISPR gene-editing technology and the possibility of curing genetic disease. Breakthroughs are sure to send the NTLA share price rocketing, but side effects are a concern.

Twilio (NYSE: TWLO)

Twilio is an American cloud communications platform as a service company. This means its technology can be bought on an as-needed subscription basis. Its technology enables software developers to add text and voice capabilities to their apps. This can be customized to meet company needs, for instance, messages between customers and delivery drivers and shipment notifications. The TWLO share price has fallen 40% in recent months.

Zoom Video Communications (NASDAQ: ZM)

Zoom video conferencing has become a popular way for businesses and families to communicate. It was a pandemic super stock, but the market was quickly saturated with competition from Google and Microsoft, among others. Zoom is bringing in revenue from advertising and shows signs of continued earnings growth.

Palantir Technologies (NYSE: PLTR)

Palantir has become an unlikely meme stock due to its secretive associations with the CIA and other government agencies. It's a data processing giant founded by Peter Thiel and is very well connected with some impressive clients and partnerships. Palantir recently joined forces with Merck to improve efficiency in the global chip shortage. Unfortunately, as long as insiders continue to dilute the share pool through share-based compensation, it may prevent sustained share price growth from occurring.

Zillow Group (NASDAQ: Z)

Zillow is an online real estate firm that saw its share price soar in 2020 and collapse in 2021. In November, it suspended its iBuying service Zillow Offers, which had been its promising growth story a year before. Without Zillow Offers, the future of the business is less clear, and investors have been pulling out in droves. Nevertheless, it's still a profitable business and is unlikely to go bust anytime soon, but the growth story is less obvious.

Other ARK Invest favorites include DraftKings (NASDAQ: DKNG), Robinhood (NASDAQ: HOOD), and Stratasys (NASDAQ: SSYS).

Is ARKK overvalued?

It's clear, from this somewhat bleak overview, that investors have actually fared better by being invested with ARK and losing 26% over the past year than if they'd been invested in any of these individual stocks alone. And credit where credit's due, it's surprising ARKK is not down a lot more today considering many of these high conviction plays.

Those in charge of the fund trade stocks daily to strike a balance between sticking to their guns and making money. This leads them to regularly double down on losers while selling winners, which results in extensive criticism.

While it likes these big-name stocks listed above, ARK has to regularly sell shares in them to keep its portfolio balanced. This includes large sell-offs of Tesla, Shopify, Zillow, SEA (NYSE: SE) and Teradyne (NASDAQ: TER) in recent months.

How has ARKK performed?

While ARK's Innovation ETF, ARKK, is down 26% in 2021 (at the time of writing), it's provided investors with a 32% annual return over the past three years and 36% over the past five years. That's impressive.

The trouble is that most ARKK investors only came on board in the past two years, so many of them are yet to reap the rewards.

ARKK vs NASDAQ 5-yr returns

Is Cathie Wood for real?

In 2020, ARKK, the company's most popular ETF, soared by 144%. Wood could do no wrong, and retail investors flocked to her funds in droves.

And many of those followers continue to believe in ARK's selection methods and remain utterly loyal in their commitment to ARK and belief in Cathie Wood's vision.

But not all. Many now doubt her ability to lead, calling her a one-hit wonder, charlatan and fraud. Her devout Christian belief that God is guiding her stock picks doesn't always help her cause either, as many now see her as a phony fleecing the masses.

So, which is it?

Like the bulls vs. bears in every stock story, ARK has its fans and foes. Time will tell if Cathie Wood is a genuine hero on the side of the retail investor or a capitalistic genius with her own selfish agenda.

The point of an ETF is to set and forget for the long-term, so for Investors looking for short-term gains, it's probably not a good investment choice anyway. And for those betting against ARK Invest, there's now the SARK ETF that shorts its portfolio.

Ultimately, it's up to the individual investor to decide if they believe in Wood's long-term vision and have the patience to ride out the bad years while capitalizing on the good.

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In this article:

Topics:
ARK
Ark Invest
Bear Market
Growth Investing
Industries:
Communication Services
Information Technology
Financials
Companies:
Tesla
Coinbase Global
Unity Software
Teladoc Health
Shopify
Square
Roku
Spotify
Intellia Therapeutics
Palantir Technologies
Twilio
Zoom Video Communications
Zillow

Author: Kirsteen Mackay

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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