Last December, Cathie Wood's ARK Innovation fund was languishing at multi-year lows, and Wood's reputation as a genius picker of future high-flyers tanked alongside the value of her flagship ETF. But this year, ARK has staged a rebound. Since sinking below $30 in late 2022, its price has jumped to $44 as of August 31, good for a 44% gain that's quadruple the S&P's advance in the same period. By mid-summer, ARK had restored its old oft-achieved standing as America's most actively traded, diversified ETF. (Wood's firm did not return a call for comment.)
Indeed, Wood profited from riding a number of this year's big winners, including Coinbase, DraftKings, Exact Sciences, and especially Tesla, its largest holding at 11% of the portfolio. But what do ARK's choices look like when examined from the perspective of fundamentals such as the dollars in earnings it offers for each dollar of investment, or how fast the profits of the companies it owns would have to grow en route to handing you a big return several years hence? I just made an assessment of ARK's investments centered on the basics. And I found a collection of companies that in total, are so overvalued, and so unlikely to perform the super-heroic feats necessary to garner even mediocre returns, that if such an array hadn't existed, it would have to be invented as the ultimate in dubious long-shots.
The best way to look at ARK: As one big company
Let's consider ARK Innovation as one big holding company we'll call ARKK, Inc. (named for its symbol) that's a minority shareholder in a number of enterprises. It effectively "owns" a percentage of the sales and profits in each one that corresponds to the size of its stake. Roll up its slice of the revenues and earnings in all of them and you get the total for ARKK, Inc. Measure those all-in profits against what you're paying for them, and you get at least a partial guide into whether buying into ARKK, Inc. right now is a good or bad deal.
I performed this analysis for the 27 ARK Innovation holdings that each account for at least 0.5% of its total portfolio. We'll use Tesla as an example. ARK owns $868 million in Tesla shares for a 0.1% position. Hence, its portion of the EV-maker's annualized profits, as of its last fiscal quarter, is $12.6 million, or one-tenth of a percentage point on its $12.6 billion in "normalized" net earnings after unusual items. I did the same math with all of the other 26 holdings, and here's what I found.
Only 4 of ARKK's 27 holdings are making money: Tesla, Zoom, Meta, and Teradyne. But the latter two combined constitute just 1.5% of the fund. All in, our ARKK, Inc.'s share of the profits for those four money-spinners is $18 million. The crowd of nearly two-dozen that are posting deficits swamp the profitable crew. The underwater contingent recorded negative normalized earnings of just over $500 million, meaning that as a "company," our ARKK, Inc. "lost" over half-a-billion dollars.
How about revenues? Adding its pro-rata claim on the sales of each of the 27, you get a combined count of just under $1.5 billion. So ARKK, Inc. is "losing" around 33 cents in every dollar in sales.
The big odds against tomorrow: A steep climb to profitability
All told, the market value of ARKK, Inc's holdings in these 27 companies is $7.8 billion. It's providing a negative "earnings yield" of 6.4% on what you're paying for your shares. Put another way, if it were an a single enterprise, our invented ARKK, Inc. would be burning 6.4 cents for every dollar you invest in the overall company.
Of course, Wood will tell you it's all about the promise of stupendous growth to come. Just how fabulous does that surge from deep loss to big profits need to be for investors to harvest strong returns? Let's say that given the riskiness of this portfolio, you'd want 10% annual gains over the next seven years to jump in. ARK's market cap would double to around $15 billion. We'll also posit that ARK, Inc. sports a PE of 30 at the close of that period in the fall of 2030. In that scenario, ARKK, Inc. would be earning $500 million ($15 billion in value divided by a multiple of 30).
That could happen if ARK, Inc. tripled its current $1.5 billion sales to $4.5 billion, and made a terrific 11% in net profits on that number. But to get there, ARKK, Inc. needs to first dig out of a $500 million trench, then climb a super-steep, $500 million profit mountain. Earnings would swing from minus 33 cents on each dollar of sales to plus 11 cents. The only way to rate that outcome likely is if you forget the numbers and believe the gauzy talk about civilization-changing advances that generate never-before-seen profitability defying the laws of competition. For homespun wisdom and nest egg protection, stick to the numbers.
