Cathie Wood’s ARKK Is Cheap, But Is It a Bargain?

With the Ark fund (ARKK)  down by 65% this year, the question now is: Is Cathie Wood’s flagship exchange-traded fund a bargain?

The idea is tempting, especially amid year-end tax-loss selling.

But let’s take a good look at the fund that was once so popular to see whether it’s worth putting money into now.

Upon close inspection we see the first warning sign: The ETF is concentrated in sectors that were part of various stock market bubbles that are unlikely to reflate. Post-bubble stocks usually only manage dead-cat bounces for extended periods. The fund’s top holdings are littered with pandemic stars that since fell, including Zoom (ZM) , Teladoc (TDOC) , Roku (ROKU) , Shopify (SHOP) , and Robinhood (HOOD) . The pandemic winners all have viable businesses, but the stocks are unlikely to regain much traction until they are solidly cash-flow positive and trade at reasonable multiples.

Robinhood was also a huge beneficiary of three bubbles: cultish “meme” stocks, crypto, and the pandemic. When HOOD came public in 2021, over half of its crypto revenue came from Dogecoin alone. Meme stock mania during the pandemic prompted new account openings and a windfall of revenue from pay-for-order-flow. There’s just no hope of Robinhood’s business getting much traction without these bubbles reinflating — an improbable event — leaving HOOD to languish for years due to a lack of growth, innovation, or valuation support. Coinbase (COIN)  has flipped from considerable profits to large losses from squeezed margins and diminished volume post crypto bubble. Much like Robinhood, though down significantly from its 2021 IPO, Coinbase’s shares are likely to languish, at best.

For context, after the year 2000’s Nasdaq bubble, Cisco (CSCO) lost 90% of its value and bottomed with a price-to-earnings under 20, all while solidly cash flow positive. Only after steady stock buybacks and regained business traction did the shares start to recover — an ominous history for a number of post-bubble stocks in the ARKK portfolio.

One of ARKK’s largest holdings Tesla (TSLA) , was arguably part of an electric vehicle bubble, now down 55% this year. Indeed, a long list of EV stocks have crashed back to earth, including Rivian (RIVN) , down 77% year-to-date, and Lucid Motors (LCID) , down 80% year-to-date. While Tesla has seen brisk revenue and earnings growth, the stock has baked in continued success well into the future. Shares will likely continue to suffer from competition, questionable self-driving progress, distracted management, slowing growth, and a still rich $500 billion market cap, about 5-times sales.

Investing Is an Art, Not an Exact Science

The potential of ARKK’s non-tech-related top holdings, Exact Sciences (EXAS) , CRISPR Therapeutics (CRSP) , and Beam Therapeutics (BEAM) , can’t be dismissed. But the portfolio is tech-heavy. That would likely vastly dilute any positive impact of those biotechnology-related holdings.

ARKK’s performance over the last three years could best be likened to the Janus 20 fund from the 2000 Nasdaq bubble. That high-flying fund was the toast of Wall Street’s retail investors, attracting enormous funds during the bubble in 1998 and 1999, only to falter for years, declining by double digits annually from 2000 through 2002. Akin to Janus 20, ARKK probably has another year or two of lackluster performance with its many post-bubble holdings of broken stocks.

There are opportunities to capitalize off tax-loss selling in the coming weeks, perhaps even in ARKK, but this fund will likely continue to struggle overall in 2023. The Ark flagship fund owns plenty of volatile, speculative stocks, so the fund will move accordingly, but overall it’s likely to tread water. This market will likely still favor stocks with solid free cash flow, buybacks, dividends, minimal dilution from stock-based compensation, and reasonable valuations — a description that eludes most of the ARKK portfolio.