Thesis
Cathie Wood has been burning investors' cash for years now, losing $10 billion over the fund's life and more than $2 billion since 2022 alone. ARKK has also held significant positions in SQ and COIN, taking large hits to the portfolio just the other day. As we head towards more and more evolving economic uncertainties, I expect the rest of ARKK's innovative tech portfolio to continue to decline.
ARKK's Portfolio
ARKK's portfolio focuses on innovative tech ideas that will disrupt and systemically change industries we see today. Some of the fund's largest holdings consist of Tesla (TSLA), Zoom (ZM), Roku (ROKU), Block, and Coinbase to name a few. Below is a snapshot from WhaleWisdom, depicting the fund's holdings as of latest reporting date on 10/31/2022:
A lot of these names, such as Tesla (TSLA), Teladoc (TDOC), Coinbase, and Block have seen large losses over the last year. In my opinion, a lot of these investments are rooted in speculation and are not profitable and face significant challenges ahead.
Additionally, short interest has more than doubled in a span of 3 months. Investors are betting big that ARKK will continue to drop in price, with shares having already declined more than 40% over a 1 year period.
Coinbase and Block Inc
Coinbase and Block have both been faced with several issues over the last few days. Coinbase announced the other day that it received a warning from the SEC hinting at possible legal troubles to come. Additionally, the SEC came out with an article yesterday warning investors to use caution when it comes to crypto investments and the reserves these companies claim to have.
To make matters worse, Hindenburg research came out with a "short report" spotlighting Block. The report detailed cash app specifically, with inflated user metrics (over 50-75% fake accounts) and as a vessel for criminal activities such as fraud and money laundering; essentially making a mobile black market platform.
Both COIN and SQ have seen sharp declines in a relatively short period due to recent news reports surrounding their respective companies. What makes me more concerned is on 3/23/2023 Cathie Wood decided to double down and buy more shares of COIN and SQ.
Not even a year ago, Cathie Wood said in an interview she expected a CAGR of 50% over the next 5 years. Her risky portfolio combined with concerning growth comments like that combined with her historical performance is concerning to hear as an investor.
Risks
Given the recent banks collapsing, cryptocurrencies have seen some rallying in the recent week.
I believe as more people grow more concerned about their money in banks, these funds flowing into cryptocurrency are being used by individuals as an alternative banking asset. Coinbase could capitalize on the recent increase in demand for crypto investments and start to turn the narrative around.
A lot of ARKK's portfolio has been in innovative tech, as that is the fund's focus. Tech has been clobbered over the last 15 months but has started to see some recovery in recent months. If this trend continues, ARKK's portfolio could reverse its trend and start to realize substantial gains.
All of the reasons mentioned above could change the current outlook for ARKK and result in a hold or even a buy rating.
Conclusion
ARKK has lost more than $2 billion since 2022, and over its life has generated more money in fees than it has in returns for its investors. ARKK's poor track record coupled with speculative investment portfolio during softening economic conditions makes future growth prospects uncertain. I would recommend selling ARKK given its historical performance and recent developments.
This article was written by
Hello, My name is Mark Dougherty. I currently have an MBA in finance, and am a CFA level I candidate. I have 7 years of work experience in financial modeling and valuation of private and public companies. I enjoy looking at long only equity positions that are considered value plays that involve a margin of safety with respect to the company intrinsic value vs market value.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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