LHX - ARKX: Bet On Drones And Satellites This Decade

Summary

• After analyzing ARK's Genomic ETF and Autonomous Technology & Robotics ETF, I now move on to Aerospace & Space Exploration.
• Drone and satellite demand are mega technological trends for this decade and ARKX provides good exposure to the beneficiaries of these themes, especially in a constructive interest rate environment.
• I am fundamentally bullish on ARKX, but from a technicals perspective, I am missing one key ingredient, which makes me put ARKX on hold.

Introduction

Over the past few days, I've analyzed different ARK Invest ETFs such as Genomics ( ARKG ) and Autonomous Technology & Robotics (ARKQ). Now, I look at Aerospace and Space Technologies:

ARKX; Aerospace and Space Technologies

The ARK Space Exploration & Innovation ETF (ARKX) focuses on rising innovation across aerospace and space technologies. Here's the mix split:

ARKX ETF Exposure Mix

Niche Mix

A category called 'Aerospace Beneficiaries' makes up 43% of ARKX's overall portfolio. This involves solutions such as internet connectivity, GPS, satellite imaging, drones, etc.

The 'Enabling Technology' piece relates to companies that provide critical technologies to the aerospace and space exploration companies. For example capabilities in robotics, 3D printing, AI and data analytics.

Top 5 Holdings Mix

ARKX’s top 5 holdings include Trimble ( TRMB ), Iridium Communications ( IRDM ), AeroVironment ( AVAV ), Kratos Defense & Security Solutions ( KTOS ), and L3Harris Technologies ( LHX ).

ARKX's top 5 holdings together make up 37.5% of the portfolio. Given the specialist focus of the ETF, I consider this to be well diversified. It is also good to see that no one company has a very outsized weight in the portfolio. This reduces unsystematic risk in the portfolio.

Performance Drivers of ARKX

Obviously, in addition to a favorable interest rate environment to make growth stocks and ETFs relatively more attractive, I identify increasing demand for drones and rising global connectivity as the most important drivers for ARKX's performance.

War is increasing the demand for drones

The Russia-Ukraine war has increased the demand for advanced war drones and they are becoming a very crucial part of military tactics. Aerospace companies dealing in drone technologies are key beneficiaries of this trend.

As quoted by Washington Post:

In the battle between Russia and Ukraine, drones are integrated into every phase of fighting, with extensive fleets, air defenses and jamming systems on each side.

The market for military drones is expected to grow at a 11.7% CAGR to reach $26 billion in market size by 2028. The bigger opportunity however, is commercial drones, which is expected to grow at almost 29% CAGR to reach $47 billion in market size by 2030.

AeroVironment and Kratos Defense & Security Solutions are two of the most notable drone makers in the world. One of the world’s few full stealth drones, the XQ-58A Valkyrie drone is being manufactured by KTOS. With countries increasing their military budget spending, drones are set to become an integral part of their arsenal.

Global connectivity trends boost satellite demand

It is estimated that 50% of the global population lacks internet connectivity. Satellite launches are becoming an effective solution for this problem. For example, last year, Elon Musk’s satellites in Starlink helped Ukraine in its war by enabling internet connectivity via high-speed, low latency broadband. As the Economist noted :

Starlink has become an integral part of the country’s military and civil response to Russia’s invasion.

Low Earth orbit ((LEO)) satellites make satellite internet a reality. The market for LEOs is expected to grow at a 21.5% CAGR till 2026, when the market size would reach $9 billion.

Within ARKX, Trimble , Iridium Communications , Kratos and L3Harris are some of the key names which stand to benefit from higher LEO demand.

Technical Analysis

If this is your first time reading a Hunting Alpha article using technical analysis, you may want to read this post , which explains how and why I read the charts the way I do, utilizing the principles of Flow, Location, and Trap.

Relative Read of ARKX vs S&P500

The relative chart of ARKX/SPX500 above clearly depicts signs of exhaustion in selling pressure. This can be confirmed by the fact the decline is a lot slower as compared to the 2021 decline. This shows signs of a potential bottom formation. I anticipate price to go towards the next key weekly resistance zone. Unfortunately, I do not see any signs of sellers getting trapped on the wrong side yet to justify an entry.

Standalone Read of ARKX

On a standalone basis, the ARKX ETF is showing signs of a base formation. The highs formed in November 2022 failed to create a new low which signals signs of trend exhaustion. The $12.36 level is acting as a key weekly support zone for ARKX. I anticipate a movement up towards the $14.03 weekly resistance, after which a range formation is likely to develop for a while. Here too, I do not see any clear signs of sellers getting caught trading the wrong side. Hence, I do not have an entry trigger just yet.

Summary

Drone and satellite demand are mega technology trends for the current decade. Growth stocks and ETFs exposed to this theme such as ARKX stand to be major beneficiaries of this theme. Interest rate hikes can always play spoilsport however, so it is important to keep a close eye on them.

Overall, although I am fundamentally bullish, I have strict technical criteria for my buys and according to my framework, the critical element of seeing evidence of other players in the market getting trapped on the wrong side is missing. Thus, I have ARKX on 'hold' in my list of compelling fundamental buys, waiting for the right technical trigger.

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