1 Tweet Shows Why ARKK Has Become Uninvestable

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Over the past few years, the ARK Innovation ETF (NYSEARCH:ARKK) became synonymous with a certain strategy: investing in high-growth stocks at almost any price, based on a thesis that the global economy was headed for massive, spectacular, advance and transformation.

It’s a strategy that worked well for a few years. ARKK, the flagship exchange-traded fund of a since-expanded offering, provided enormous returns. The ETF began trading in November 2014, closing its first session at $20.38; at its February 2021 peak, ARKK closed at $155.12. All of the gains, and then some, came in the five years leading to that top, during which time the ETF was nearly a 10x and Wood became one of the industry’s biggest stars.

Since that top, however, ARKK has plunged 73%, and ARK’s other major funds – ARK Next Generation ETF (ARKW), ARK Genomic Revolution ETF (ARKG), ARK Autonomous Technology & Robotics ETF (ARKQ), ARK Fintech Innovation ETF (ARKF ), and the ARK Space Exploration & Innovation ETF (ARKX) – have failed sharply as well:

Chart
Data by YCharts

chart since 3/30/21, when ARK Space Exploration & Innovation ETF

Obviously, the equity market has changed dramatically. Major indices only began rolling over late last year, with steep declines not occurring until the last few months. But the most speculative names started selling off much earlier — around the same time ARKK peaked, roughly 15 months ago. (I’ve written elsewhere that the lunacy surrounding the merger of Lucid Motors (LCID) and special purpose acquisition company Churchill Capital IV was an important factor; the timing certainly lines up.)

The charitable explanation might be that Wood and ARK perhaps are not quite as smart as they looked on the way up — nor as incapable as they’ve looked over the past year-plus. After all, the truth is usually somewhere in the middle.

But it’s no longer possible to accept that charitable explanation. The response of the fund and its star manager to the sell-off in growth stocks has been incompetent. The analysis made by ARK across its investments continues to get thinner and more unrealistic (to say the least).

Increasingly, this looks like a fund that was in the absolute right place at the absolute right time. But that perfect positioning is a thing of the past. Investors can believe in ARK’s long-term thesis — but by no means should they pay ARK to invest in that thesis.

Madness Peaks

A single Tweet does not make a bear case, but it’s worth understanding how insane this post actually is:

Let’s start with the first sentence, and Wood’s argues that her company “must share more of our research” about AGI. There’s literally zero evidence that ARK has done any research on this particular topic. It’s not mentioned on the ARK Funds website; Wood (who has Tweeted over 5,700 times) has never previously mentioned it; you haven’t Director of Research Brett Winton, whose original post Wood is amplifying here. Winton also replied to his tweet with more ‘evidence’ — an academic paper with which ARK had zero involvement.

Obviously, it’s possible that ARK has done some work in-house. But this is also a company that continues to promise “open source” models; yet Tesla (TSLA) appears to be the only such model actually released to date. (More on that in a moment.) And notably, Winton once again isn’t citing his own firm’s research here. Instead, he’s posting a chart from Metaculus, a platform based on crowd-sourced opinions. Winton’s Tweet is research by the standards of Twitter — not by the standards of quality investment analysis.

No doubt there is value in the wisdom of crowds. But it’s silly to argue, without skepticism, that in a matter of weeks the crowd has correctly moved ahead by years the launch date of a massively transformational technology.

But Wood’s second sentence is where this goes off the rails. To be blunt, someone who predicts 30-50% annual GDP growth for whatever reason is not someone who should be taken seriously. On his face, that’s a ludicrous prediction for any single year, let alone several (at least).

In the case of AI/AGI, of course, the disruption would be massive. Truly transformative AGI (and, by the way, it’s not exactly what AGI means or when its adoption, for lack of a better term, actually arrives) would lead to the obsolescence of tens of millions of jobs worldwide, and thus a tremendous shock to the globaleconomy.

But the problem with the 30-50% figure isn’t really the supposed catalyst: it’s the figure itself. Wood gives no justification for the range. Perhaps it came from the heavily-detailed research that Wood and ARK “need” to share. But it does seem an awfully big coincidence that 30-50% can be generated by just adding a ‘0’ to the 3-5% growth range Wood cites (mostly correctly) as the current rate.

A Long Road To This Point

Again, one Tweet does not make a bear case. But this weekend’s Tweet isn’t an outlier, an overexaggerated expression of broader optimism, or a result of the character limit on Twitter. It’s the apotheosis of commentary from a fund that looks increasingly detached from reality.

The aforementioned open-source model for Tesla was a good example. When ARK released the model last year, the results were laughable. ARK modeled the opening of some 25 facilities—and accounted for no need to raise capital in the course of such a massive undertaking. The $3,000 price target for 2025 completely misunderstood the insurance businesswhich was projected in a bear case to generate $23 billion in revenue that same year. ARK didn’t even account for higher shares outstanding from issuance to employees (and CEO Elon Musk, given his massive pay package). More errors — among them that the model valued Tesla at $46 billion if it didn’t produce any cars at all — were found in a hurry.

The TSLA model (left untouched for more than a year until last month) remains the only released by ARK. That’s despite the firm’s claim that it has “created an open-research ecosystem that allows for an organized exchange of insights…[from those including] external thought leaders.” One poor model is not an ecosystem.

The quality of the research seems a direct result of the inexperience of many ARK analysts, some of whose CVs consist solely of internships before joining the firm. That aside, at least per employee bios, the team’s hands-on tech experience appears minimal. Indeed, despite championing everything from electric vehicles to biotech to AI, Wood herself doesn’t appear to have a great grasp on those concepts.

Most notably, in 2018, she cited a $2 trillion opportunity in “monogenic stem cell therapy”; as the Financial Times has written, that “is not a concept scientists recognize.” A source told the FT that Wood actually was referring to gene editing — but as the paper noted, a subsequent interview with CNBC too contained a slew of errors (and another claim of a massive opportunity, in this case $1 trillion in market value). Her insistence on the value of the still-nonexistent ‘robotaxis’ opportunity for Tesla elides not just the technical challenges facing that company, but the endless rolls of red tape that must be cut before that experience arrives in the real world.

Wood has made many predictions — notably a $12 per barrel price target for oil — that haven’t panned out. That’s not the problem here. Every investor gets many things wrong, and a few things wrong in a big, big way.

Rather, the problem is that there isn’t much going into the predictions, wrong or not — and this weekend’s Tweet is only one example of that problem. In a piece on online sports betting last year, ARK used the same kind of math Wood did in her Tweet from Ella; its supposedly rigorous research just happened to conclude that the US industry would see handle rise ten times in five years at a final hold rate of 10%.

An article this month projecting double-digit digital advertising growth (at the same time the market clearly is pricing in a sharp deceleration) cites a good amount of third-party data. However, it does not mention Apple (AAPL) and its privacy policy changes once. It does have one of the most ridiculous charts you will ever see (highlighting mine):

chart from Ark Funds piece on e-commerce growth

ARK Funds, May 2022

So much of the analysis ARK is putting out is substandard at best. Even the better research — like a deep dive into satellite broadband earlier this year — lacks the context to explain what stocks benefit, and to what extent. And though the company has done so with TSLA, there’s not usually public discussion of that those trends actually mean for a specific stock in terms of valuation.

In other words, ARK sounds a lot like the investors that tend to do exceptionally well in bubbly environments. They have the eye for big trends, but can’t seem to get too much further than simply buying the stocks that could benefit from those trends. Valuation concerns are dismissed, and a steadily rising portfolio on its own seems to support the investor’s ‘edge’.

That strategy works until it doesn’t, as the performance of ARK funds shows.

A Failure To Adjust

To be clear, this alone doesn’t mean that ARK’s long-term strategy is necessarily incorrect. Nor is this to argue that ARK’s current portfolio doesn’t have some value. Though the 73% decline doesn’t make the funds’ holdings ‘cheap’, there are some intriguing names on the list. (To my eye, top 10 ARKK holdings Zoom Video Communications (ZM), Twilio (TWLO), and Teladoc Health (TDOC) all are intriguing at the right price, with the caveat that I don’t personally believe any are quite yet at compelling levels.At these levels, however, reasonable investors can disagree.)

But owning ARKK or any of the other ARK funds isn’t just a bet on the long-term thesis being correct. It’s a bet on Wood and her team de ella picking the best stocks to play that thesis, a bet that for ARKK costs 75 bps in annual expenses. And in a market that looks very different from that of the last few years, and a market that seems exceptionally unlikely to see a return to past optimism, that means ARK has to adjust.

The firm isn’t doing so. Ten months after her portion of the market clearly had cracked, Wood in late December projected 30-40% compounded annual returns over the following five years. ARKK is down 58% since then. As far as I can tell, there’s been no admission that the market’s priorities have changed, or that valuation and profitability matter far more going forward. Instead — following a massive bull market in which investors of all stripes focused too much on long-term growth — she claims other asset managers are “short-sighted.”

Wood’s longer-term optimism may in time be proven correct. It may be, as she put it on Saturday (in another odd Tweet), that the “future of investing is investing in the future.” But investing in the future isn’t enough for ARK to succeed; the firm needs to invest in the future well.

We don’t have much evidence to suggest ARK can do so. With its principal forecasting 30%-plus annual GDP growth, we have a good deal of evidence that it probably can’t.

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