The financial media has the ARK Innovation ETF (NYSEARCA:ARKK) stock all wrong. Cathie Wood created ARKK, and other ARK funds, to capture long-term trends in technology. The whole idea of an ETF, of any mutual fund under active management, is to play out its theme over time.
Now, because the value of ARKK stock rose nearly 200% during the pandemic year, Wood has become “the tech whisperer.”
Her every move is interpreted based on the short-term future when that’s not what ARKK is about at all.
Wood’s thesis is that, over the long run, the disruptive technologies spurred by Moore’s Law will transform the economy, to the benefit of disrupters.
This should not be controversial. Over the last decade cloud computing, its suppliers and the services made possible by it have transformed the world economy. The five cloud czars – Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon.Com (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), and Facebook (NASDAQ:FB), have become growth’s landlords.
They have replaced the old phone companies, bypassed the banks, created enormous efficiency, and brought the developing world’s people into the economic mainstream. And they’re just getting started.
A Closer Look at ARKK Stock
All this should be obvious. The question becomes, what happens next? What happens, according to Wood, is that disruption continues. So ARKK buys disrupters.
The problem is that once everyone piles into any idea, that idea ceases to work. The disrupters became overvalued. You can see this just looking at ARKK’s largest holdings, which are all part of the public record.
Tesla (NASDAQ:TSLA) is overvalued. At $685 billion it’s worth more than the auto industry it’s part of. Square (NASDAQ:SQ) is overvalued. At $111 billion it’s worth over 550 times its annual earnings.
Teledoc Health (NASDAQ:TDOC) is not worth over 28 times its revenue, nor is Roku (NASDAQ:ROKU) at 25 times. Zillow (NASDAQ:Z) isn’t worth its huge premium as it becomes just another house-flipper.
Over the long run, the theme of disruption does work. But over the short run, piling into disrupters leaves these stocks overvalued.
As the market for the stocks in ARKK’s ETF has grown overheated, their value has fallen recently. ARKK stock traded at $152.77/share in mid-February. It should open today at somewhere around $121.
Wood, Critics and ARKK Stock
This does not mean Wood has lost her touch. It means the theme she’s following is overvalued in the near term. Analysts anxious to see Wood fall are piling on, comparing ARKK to past mutual funds that blew up when bull markets ended.
These critics may be right. In the near term, Wood’s fund is vulnerable because stocks like OpenDoor (NASDAQ:OPEN), Coinbase Global (NASDAQ:COIN) and Zoom Video (NASDAQ:ZM) may not currently be worth what investors are currently paying for them.
But Wood is also right.
“Over the next 5-10 years, we will see more innovation than we ever had in history,” she said at a recent investor conference.
The changes wrought by Moore’s Law, in every direction, are only accelerating. They must because the challenges created by the industrial revolution threaten all human life on this planet.
The Bottom Line
ARKK is like any other thematic mutual fund. It’s a long term investment, not a short term trade.
ARK’s theme is the disruption caused by cloud computing. Right now, that theme may be overbought.
That’s the thing with disruption. Disrupters can easily be disrupted. The market responds to disruption with new disruption.
Over the next five years some of Wood’s holdings will become losers. If you buy ARKK stock today, you are betting Wood will recognize when that happens and sell, just like any other smart fund manager.
But watch her small bets, drug stocks like Compugen (NASDAQ:CGEN), additive manufacturing companies like Stratasys (NASDAQ:SSYS), or companies like PagerDuty (NYSE:PD) operating in the machine Internet.
Over the long run, Wood’s theme is correct. Buy the future and profit when it arrives.
At the time of publication, Dana Blankenhorn directly owned shares in AMZN, MSFT, AAPL and FB.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.
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