2023-09-20 03:28:09 ET
Summary
- Cathie Wood seemingly slashed expectations for her ARK Innovation ETF.
- Wood now predicts a 15% annual growth rate for the next five years, a significant downgrade from previous targets.
- The ETF manager has blamed the Fed for her poor performance, but this argument doesn't quite match reality.
When it comes to exchange traded funds, there may not be a more prominent manager currently than Cathie Wood. The CEO of Ark Invest has been in the news quite often for her high profile calls, primarily around Tesla ( TSLA ), that led to massive gains as the Fed's balance sheet exploded in size around the coronavirus. Over the past couple of years however, the firm's funds have not performed so well, and on Monday, Cathie Wood seemed to slash expectations for her flagship fund, the ARK Innovation ETF ( ARKK ).
After peaking at nearly $160 in early 2021, many of ARKK's holdings that benefited greatly from Covid started to pull back, and quite tremendously. Names like Zoom Video ( ZM ), Roku ( ROKU ), and Twilio ( TWLO ) that saw massive revenue growth rates come crashing down saw their stocks fall as well. With just a couple of weeks left in 2021, the ETF found itself a little below $100, and Cathie Wood published a blog piece saying that despite this major contraction, innovation stocks were not in a bubble.
I am not a fan of the ARK Innovation ETF at the moment, which is why I have a hold rating on it currently. The top 6 holdings seen below, along with Twilio that I mentioned above, represent half of the ETF's total weight. A number of these names have near zero or even declining revenue growth rates at the moment, and a few of them are losing massive amounts of money and burning through lots of cash. Tesla even worries me a little if this news of a potential Federal investigation into Elon Musk turns out to be something big. The ETF also holds a lot of very speculative biotech and healthcare names like Invitae ( NVTA ) and Cirrus ( CRUS ), both of which have hit new lows this week.
ARKK Top 6 Holdings (Ark Invest)
At the same time, I wouldn't go out and short this ETF at the moment. If the Federal Reserve is close to a maximum rate, the overall market could rise, and that would benefit ARKK as it has in the past. A lot of these stocks are seen as growth names, even if they aren't really growing, and they can easily double or triple the return of the overall market during a bull run. Once we get through some of these market fears about an economic slowdown and the Fed continuing rate hikes, we can evaluate the ETF again.
It was in that blog post that Cathie stated her strategies could return 40% a year for the next five years, a target that was reduced shortly thereafter to a range of 30% to 40%. Based on where ARKK was at the time, a 40% compound annual growth rate implied that by mid December or 2026, the firm's flagship fund would be a little under $523. While past performance is never an indication of future results, there was certainly a lot of optimism here that another massive run could be coming.
In the short term, things did not turn around at all, and in fact they got quite a bit worse as the chart below shows. As I discussed in a previous article on the name, Cathie Wood went on CNBC to detail a 50% annual target a few months later, which itself could have been interpreted as a downgrade of the ETF. Since then, ARKK has fallen even more, and although it is up substantially off its lows, Monday's close at $42 leaves it galaxies away from where it would be on any of those long term 5-year target paths.
ARKK Last 5 Years (Seeking Alpha)
On Monday evening, Cathie Wood appeared on CNBC Fast Money to discuss Tesla and her overall view of the markets. When asked about some of her forward looking thoughts and ARKK itself, she stated that she was looking for a 15% annual growth rate over the next five years. This statement implies that by September 2028, the firm's flagship fund will be at roughly $84.50. Not only is this number dramatically below some of her previous targets, but it's actually a bit below the $97.20 price that ARKK closed at when she published the blog piece discussed above.
I also find the new 15% target a bit curious. Cathie Wood during her interview reiterated her $2,000 base case for Tesla shares in five years. In publishing a few other models online here , ARK has put out sky high price targets for some of the fund's top holdings. If some of these top holdings do end up more than tripling from here over the next few of these years, that itself will result in tremendous price appreciation from ARKK. Does that mean that Cathie Wood believes many of her other holdings will actually decline? If ARK Invest released all of its five year price targets today, it seems like there would be a major mismatch in the fund's price appreciation versus the surge in its components.
In many of her recent appearances, Cathie Wood has blamed the Federal Reserve for the poor performance of her funds. She has talked about the unprecedented roughly 20 fold increase in interest rates hurting her strategies. While that rate of rate hikes isn't traditionally what we have seen in the past, the Fed was starting from near zero here. In overall percentage terms, we've certainly seen times where the Fed's primary rate rose more than 500 basis points during a tightening cycle.
I don't really buy the blame the Fed reasoning for this underperformance. First of all, and perhaps more importantly, ARKK was roughly 65% off its peak before the first rate hike even happened. It was very clear that the Fed was going to raise to get back to more normal monetary policy, and this was even before inflation really surged which resulted in further hikes. The job of a good investment manager is to adjust to changes in the macroenvironment, and it is clear that ARK Invest hasn't done so. The flagship fund remains around 73% off its all-time high, but that's much worse than any of the major US indexes or even the NASDAQ 100 Index that many people compare ARKK to.
In the end, Cathie Wood's Monday appearance on CNBC seemed to be a massive downgrade in her firm's flagship fund. Previously, the notable ETF leader was calling for massive upside in her strategies, which would send ARKK to hundreds of dollars per share by late 2026. Now, Cathie Wood is only talking about returning 15% a year for the next five years, which would leave the flagship fund still almost half off its all-time peak. While the ETF manager primarily blames the Fed for her massive underperformance, that argument doesn't always hold water. With ARK Invest holding many of the same names it has for the past several years, it doesn't appear that there will be a change in overall strategy here.
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ARKK: Cathie Wood Slashes Expectations For Flagship Fund