ARK Innovation ETF (NYSEARCA: ARKK) has collapsed by over 60% in 2022. The widely followed flagship fund of Cathie Wood was a star performer in 2020 but began to lose its way last year. It still has a massive loyal following, so is it worth getting on board today? Let's take a look under the hood.
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.
ARK's team of analysts screens 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.
Two years 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 21 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 future growth areas. 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, gene therapies, DNA sequencing, 3D printing, targeted therapeutics, robotics, electric and self-driving cars, energy storage, telemedicine and blockchain technologies.
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 publicly shares its daily stock trades, allowing investors to see exactly what moves are being made in the funds. This transparency has helped propel its popularity while simultaneously 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, which continued to climb above $42bn.
That's a 1,224% rise in under two years. But today, ARK's AUM is around $14.1bn.
So, what does this mean? It means Cathie Wood is a wealthy woman. According to Forbes, the founder and chief is worth around 2% of ARK's assets under management. That would currently equate to $282m.
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 may be 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.
The main reason for the markets tanking and investors running for cover in 2022 is inflation. Rampant inflation is causing central bankers to raise interest rates which is not good news for businesses. However, Cathie Wood strongly believes that disruptive innovation will result in deflation much sooner than the majority anticipate. This drives her conviction in backing so many highly speculative stocks.
While many of these are solid companies with a clear path ahead, inflation and interest rate rises hit their margins and reduce access to funding. This means the future growth and financial strength of these stocks is uncertain.
Due to investing in the business's future potential rather than the current reality, many of ARK's 2020 stock picks became highly speculative investments trading far above fair value. Indeed, analysts have since slashed their price targets on many of ARK's holdings.
Let's look at ARK Invest's high-conviction stocks.
Top Holdings of ARKK:
Tesla (NASDAQ: TSLA)
First and foremost, ARK's main conviction stock is EV maker Tesla (NASDAQ: TSLA). With its controversial founder Elon Musk being crowned TIME's 'person of the year,' at the end of 2021, he's since fallen from grace and become CEO of Twitter (NYSE: TWTR). Tesla is a polarising stock at the best of times, so for ARK to have this as its main asset, it's no wonder the fund manager comes under fire. Tesla has repeatedly surprised to the upside, and its share price climbed 49% in 2021 but has fallen 43% in 2022. Tesla fans believe it will bounce back, but bears think it has further to fall.
Zoom Video Communications (NASDAQ: ZM)
Zoom (NASDAQ: ZM) video conferencing has become a popular way for businesses and families to communicate. It was a pandemic super stock, but the market became saturated with competition from Google and Microsoft, among others. Zoom is bringing in revenue from advertising and shows signs of continued earnings growth. ARK owns 3.43% of Zoom stock.
Roku (NASDAQ: ROKU)
Digital media player manufacturer Roku (NASDAQ: ROKU) has seen its share price collapse by 81% in the past year. Roku sells low-margin hardware to broaden its access to a user base it can then advertise to. Its platform segment has a 48% gross profit margin from which it generates revenues through short-form video adverts. It also makes money from other types of advertising.
Exact Sciences (NASDAQ: EXAS)
Exact Sciences (NASDAQ: EXAS) is a molecular diagnostics company specializing in detecting early-stage cancers. The stock traded above $155 in February 2021 but has since dropped to $34. Its partnership with Pfizer (NYSE: PFE) ended near the end of last year.
Block (NYSE: SQ)
Jack Dorsey's digital payments company, formerly known as Square, has seen its share price fall 76% in the past year. This highly volatile stock has been up and down like a yoyo after soaring over 800% during 2020.
Intellia Therapeutics (NASDAQ: NTLA)
Intellia Therapeutics (NASDAQ: NTLA) saw its share price take an almighty leap in July but has since coasted along without much enthusiasm. It's down 70% from its September 2021 high. Intellia is exploring CRISPR gene-editing technology and the possibility of curing genetic diseases. Breakthroughs will surely send the NTLA share price rocketing, but side effects are a concern.
UiPath (NYSE: PATH)
UiPath (NYSE: PATH) makes software for robotic process automation. The stock is down 83% since its IPO in April 2021. However, the business is growing, and the pandemic opened doors for this trend to continue as automation becomes essential to businesses of all sizes. UiPath is helping companies automate their workflow, which is proving popular as employees fall sick or isolate.
Teladoc Health (NYSE: TDOC)
Teladoc Health (NYSE: TDOC) 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 $28.
Twilio (NYSE: TWLO)
Twilio (NYSE: TWLO) 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 75% in the past year.
Coinbase (NYSE: COIN)
Coinbase (NYSE: COIN) 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. Coinbase stock is down 82% in the past year.
Shopify (NYSE: SHOP)
Shopify (NYSE: SHOP) powers e-commerce sites all over the web. Over the past decade, it 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. SHOP stock is down 74% YTD.
CRISPR Therapeutics AG (NASDAQ: CRSP)
Cripsr Therapeutics (NASDAQ: CRSP) is down 74% since its 2021 share price high. CRISPR technology has the power to cure deadly genetic diseases, but many worry it brings untold risks. CRISPR Therapeutics and Vertex Pharmaceuticals (VRTX) are jointly applying for US approval of a CRISPR-based drug to treat Sickle Cell Disease and Beta Thalassemia.
ARKKs Top-15 Stocks Previously included:
Spotify Technology (NYSE: SPOT)
Music streaming sensation Spotify (NYSE: SPOT) is another highly volatile stock, down 73% 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.
Palantir Technologies (NYSE: PLTR)
Palantir (NYSE: PLTR) became 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 joined forces with Merck to improve efficiency in the global chip shortage. Unfortunately, as Palantir insiders continue to dilute the share pool through share-based compensation, this may prevent sustained share price growth.
Zillow Group (NASDAQ: Z)
Zillow (NASDAQ: Z) is an online real estate firm that saw its share price soar in 2020 and collapse in 2021. Z is down 84% since its high. In November 2021, 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 unlikely to go bust anytime soon, but the growth story is less obvious.
Unity Software (NYSE: U)
Unity (NYSE: U) is a Danish video game software development company based in San Francisco. As Unity is an early entrant into the metaverse space, it appeals to those sold on the idea of Web 3.0. Along with AR/VR, AI, RT3D, and Digital Twins, investment in this space accelerated last year, and Unity 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 has since dropped 85%.
Is ARKK overvalued?
From this somewhat bleak overview, it's clear that investors have suffered if they bought into ARKK or any of these individual stocks at the time of the 2020/21 hype.
Stocks are traded daily in the ARKK fund to strike a balance between sticking to their visionary guns and making money. This leads them to regularly double down on losers while selling winners, which results in extensive criticism.
While ARK likes the big-name stocks listed above, it has to regularly sell shares in them to keep its portfolio balanced. This includes large sell-offs in even its biggest conviction plays, including Tesla, Shopify, and Zillow.
How has ARKK performed?
ARK's Innovation ETF, ARKK, is down 60% in 2022 (at the time of writing), and even those that invested early, up to five years ago, are sitting on a loss. The trouble is that most ARKK investors only came on board in the past two years, so the majority are yet to reap any rewards.
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.
Article updated November 2, 2022.