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Tesla, Square, and Zoom? ARKK can’t miss. But is it still a buy after its historic year?
Let’s find out in this ARK Innovation ETF Forecast and Analysis.
What is ARKK?
The ARK Innovation ETF (ARKK) is the firm’s flagship fund and the largest active ETF in the world with $22 billion AUM.
It is the all-encompassing ARK fund – it invests in each category of “disruptive innovation”, whereas other ARK funds narrowly focus on the best fintech stocks or genomics.
ARKK is interested in companies that enable or stand to benefit from disruptive innovation — specifically those centered around artificial intelligence, robotics, energy storage, DNA sequencing, and blockchain technology.
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See: Best ARK ETFs
Making Sense of ARKK
ARKK’s focus on disruptive innovation orients the fund heavily towards growth and away from zombie industries, or what the firm calls “Bad Ideas”.
Many of these technologies are brand new and difficult to price in the public markets.
We recommend a long-term mindset when investing in ARKK — innovations can have flat adoption curves for many years and then accelerate quickly.
Investing in new markets is risky because it’s difficult to benchmark performance to historical trends.
ARK believes that traditional investors underestimate and misunderstand these innovation trends. Investors willing to tolerate these risks should have long-term time horizons.
ARK Innovation ETF Details
- Ticker: ARKK
- Type: Active Equity ETF
- Inception Date: October 31, 2014
- Expense Ratio: 0.75%
- Fund AUM: $22 billion
- Typical Number of Holdings: 40-60
- Weighted Avg. Market Cap: $118 billion
- Median Market Cap: $20 billion
- Active Share (S&P 500): 97%
#1. Tesla (TSLA) 11.1%
Tesla is an electric vehicle and clean energy company based in Palo Alto, California. It was founded in 2003 by Elon Musk.
Tesla dominates the U.S. electric vehicle market — however, ARK is most excited about its AI capabilities, specifically its potential for autonomous driving.
ARK’s founder Cathie Wood famously slapped a $800 price target (split-adjusted) on Tesla in 2019, back when the stock was around $60.
In March 2021, she upped her target to $3,000 per share by 2025, which amounts to a 37% average annual return on TSLA.
Ark is staking this price target on Tesla creating and dominating the “Robo Taxi Market”, where autonomous Teslas would give rides to paying customers 24/7.
There’s no shortage of opinions regarding Tesla stock, just like there’s no shortage of TSLA in ARK funds — it is the primary holding in several of Cathie Wood’s ETFs.
Tesla’s Disruption Target: Gas-powered automakers, the entire energy industry, and planet Earth
Full Analysis: Tesla Stock Analysis
#2. Square (SQ) 6.4%
Square is a financial services and digital payments company based in San Francisco, CA. It was founded in 2009 by Jack Dorsey and Jim McKelvey and has since become the gold standard of fintech.
Square began offering Point-of-Sale (POS) hardware and software to “unbanked” parts of the U.S., enabling merchants to process credit card purchases.
The launch of the Cash App put Square into new and exciting markets: P2P payments, mobile banking, and the ability to buy and sell bitcoin.
Square is driving the adoption of mobile wallets, an ecosystem that will exponentially expand in the coming years. Expect Square and PayPal to hoard growth in this space.
Square’s Disruption Target: Banks and other traditional financial services
Full Analysis: Square Stock Analysis
#3. Teladoc Health (TDOC) 6.3%
Teladoc Health is a multinational telemedicine and virtual healthcare company based in the United States.
Its primary services include telehealth, medical opinions, AI and analytics, and licensable platform services.
Teladoc makes money in two ways:
- Charging subscription fees to insurers who fully cover TDOC members
- Per-visit fees for patients who are not covered by insurance
ARK is counting on the long-term adoption of remote healthcare — a trend that was forced and normalized during the pandemic.
Teladoc’s Disruption Target: Healthcare
#4. Roku (ROKU) 6.0%
Roku manufactures various types of digital media players for video streaming, in addition to its advertising and licensing operations. It was founded in 2002 by Anthony Wood.
Roku enables you to stream internet apps on your TV — platforms like Netflix, Disney+, and YouTube download onto Roku devices and appear on your TV.
Roku bridges the gap between platform and end-user. It turns your dumb TV into a smart TV.
Roku Disruption Target: Linear TV
#5. Zillow Group (Z) 3.6%
Zillow is the leading real estate and rental marketplace that provides accurate home-related information to customers.
In 2020, it had 36 million unique monthly visitors, which outpaced the second closest U.S. real estate website by 13 million users.
Zillow’s brand awareness is strong and growing — more people search “Zillow” in Google than “real estate”. Anticipate turf wars between Zillow and Airbnb in the near future.
Zillow Disruption Target: Financial intermediaries
#6. Zoom Video Communications (ZM) 3.5%
Zoom is a frictionless video conferencing platform that connects people and businesses. It was founded in 2011 but rose to prominence during the Covid-19 crisis.
At the onset of the pandemic, the market was looking for the best video communications platform — Zoom became the consensus winner. Network effects set in and made Zoom a household name.
Zoom is trying to become more than a “pandemic stock” and capitalize on the normalization of remote business meetings.
Zoom’s Disruption Target: Communication and Productivity tools
#7. Shopify (SHOP) 3.26%
Shopify is an e-commerce platform that allows creators to easily launch retail businesses. It provides a full suite of cloud-based services that enable merchants to start, sell, market and manage their sales channels.
Shopify aims to be “the world’s first global operating retail system” to accommodate the growing e-commerce economy.
Amazon and Shopify dominate this market. In 2020, online retail accounted for just 11% of total sales — there’s still enormous growth potential for this stock.
If Amazon is customer-obsessed, then Shopify is merchant-obsessed. The company has created millionaire after millionaire and works closely with its merchants.
Shopify’s Disruption Target: Legacy Retail
#8. Spotify Technologies (SPOT) 3.17%
Spotify is the world’s biggest music streaming platform by number of subscribers. It uses a freemium model to monetize subscribers — users can upgrade to Spotify Premium to ditch the advertisements for $9.99 a month.
Spotify had 345 million users and 155 million paying subscribers as of Q4 2020, bolstering a 34% estimated market share. Apple Music ranks second at 72 million paying subscribers.
Spotify is investing heavily towards podcast assets and infrastructure — it purchased The Joe Rogan Experience for $100 million and Bill Simmons’ Ringer for nearly $200 million, in addition to signing the Obamas and Kim Kardashian, among others.
It reportedly paid $340 million to acquire Gimlet and Anchor back in 2019. It recently spent another $235 million to land the podcast and advertising company Megaphone.
Spotify has the platform to seamlessly enter new markets — could it eventually become a challenger to Netflix?
Spotify’s Disruption Target: The Entertainment Industry
#9. Baidu Inc (BIDU) 3.04%
Baidu is mainland China’s version of Google — it is a search engine company that controls +78% of the market share.
It provides many of the same services as Google, such as Maps, Images, News, etc.
Much like its Mountain View counterpart, it leverages search advertising revenues to invest heavily in AI and other Internet of Things applications.
However, it’s a fraction of the size of Google — it has a market cap of $75 billion compared to Google’s $1.5 trillion.
The following equation describes Baidu’s investment potential:
Room for Growth + China’s Population + Little Competition by Law
Remember, Google is banned in mainland China.
Baidu’s Disruption Target: N/A
#10. Twilio (TWLO) 2.77%
Twilio is a platform that enables developers to add communication functions to their applications, like chat, text, voice, email, or video.
Twilio created the Communications Platform as a Service (CPaaS) business model and benefited from being the only show in town. More than 9 million developers use Twilio — its next largest competitor has just 1.2 million users.
Twilio sees its total addressable market (TAM) at $100 billion by 2023. Its 2020 revenues represent 2% of that TAM.
While those are ambitious projections by any definition, the company’s business model is sound. Its ability to cross and upsell additional products to existing customers has resulted in impressive growth metrics.
Twilio’s Disruption Target: Traditional Communication
ARKK Technology Breakdown
ARK breaks down the types of technology these companies create or stand to benefit from — all 22 of them. Here is the comprehensive list of technologies in ARKK:
- E-Commerce: 13.4%
- Cloud Computing: 11.7%
- Digital Media: 10.5%
- Big Data and Machine Learning: 7.6%
- Mobile: 6.6%
- Internet of Things: 5.5%
- Gene Therapy: 5.5%
- Molecular Diagnostics: 4.4%
- Bioinformatics: 4.2%
- Instrumentation: 3.8%
- Energy Storage: 3.6%
- Autonomous Vehicles: 3.5%
- 3D Printing: 3.4%
- Targeted Therapeutics: 3.3%
- Next-Generation Oncology: 2.7%
- Beyond DNA: 2.5%
- Social Platforms: 2.4%
- Robotics: 2.0%
- Space Exploration: 1.4%
- Development of Infrastructure: 1.1%
- Blockchain & P2P: 0.8%
- Stem Cells: 0.0%
ARKK has returned +100% in the past year — that level of success attracts its fair share of criticism
#1. The Few Carry the Many
Some argue that ARK’s big bets on a handful of names have carried the funds, like Tesla, Square, and Roku.
This could also be called conviction, but critics chalk up the winners to “right place right time” and not a repeatable process.
Some are concerned with ARKK’s liquidity. The fund owns a large stake in several companies, making it difficult to exit positions during times of crisis.
Also, ARK tends to buy illiquid small-cap stocks when the fund experiences massive outflows. Critics believe this strategy exposes the fund to predatory shorting.
Any hedge fund can see exactly what Ark is buying and selling, too — the firm publishes its order flow daily.
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ARKK ETF FAQs
What companies are in ARKK?
ARK aims to invest in companies that drive “disruptive innovation”, such as Tesla, Square, Teladoc Health, Shopify, Zoom, Zillow, Spotify, Baidu, and Twilio. This investment strategy orients the company towards growth and sometimes unprofitability.
What does ARKK stand for?
ARKK is the ticker symbol for Cathie Wood’s flagship ETF — the ARK Innovation ETF. It is the largest active ETF in the world with $22 billion AUM. ARKK is one of six active ETFs offered by ARK Invest.
What is the fee for ARKK?
The fee, or expense ratio, of ARKK, is 0.75%. This means that you will pay ARK $75 for every $10,000 you invest in the fund.
Does ARKK pay a dividend?
ARKK pays an annual dividend of $2.04 per share, which has a dividend yield of 1.65%.
What is the best ARK ETF to buy?
The best ARK ETF depends on the type of disruptive innovation you’re interested in — the firm offers six ETFs that invest in areas from space exploration (ARKX) to financial technology. However, its all-encompassing ETF is the ARK Innovation ETF (ARKK).
Is ARKK a safe investment?
Ark aims to capture massive returns by investing in disruptive companies. This strategy attracts investors looking for risk/reward upside instead of a “safe” investment.
What kind of ETF is ARKK?
ARKK is an active ETF, which means that portfolio managers actively monitor the fund’s holdings and allocations. ARKK will buy and sell thousands of shares daily, compared to a passive ETF that simply tracks an index.
Bottom Line: ARKK Innovation ETF
Cathie Wood changed the investment industry with the ARKK fund. Where she goes, many will follow.
There will be short-term turbulence in these new cutting-edge markets. Expect ARK to continue its course regardless.
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Sean Graytok does not own shares of ARKK as of this writing.