Block up this leaking ARKK

Cathie’s ARK has sprung a leak…

Bad puns aside, this past month has been terrible for Cathie Wood’s flagship exchange traded fund.

The ARK innovation ETF (ARKK) was flying high at 156.68 back in February 2021 before plunging to 117.07 by the end of the month. Since then the fund has oscillated in a range between the 128 & 104 zones, before falling again to a low of ~92 earlier this week.

What’s going on?

To answer that, we first need to look at what ARKK is all about:

ARK defines ‘‘disruptive innovation’’ as the introduction of a technologically enabled new product or service that potentially changes the way the world works.

Companies within ARKK include those that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research relating to the areas of:

• DNA Technologies and the “Genomic Revolution”
• Automation, Robotics, and Energy Storage
• Artificial Intelligence and the “Next Generation Internet”
• Fintech Innovation

One major weakness of highly disruptive, innovative companies is that they struggle to turn a profit early on. They’re too busy innovating, iterating, testing and trying again to worry about such trivial things as actually making money.

Investors are always looking for the next ‘unicorns’ to invest in. The payoff can be huge if they get it right. But it’s tricky to pick just one… What if you back the wrong company and miss out?

That’s where the appeal of ARKK lies. Back a group of hopefuls and the payoff from the genuine successful innovators will massively outweigh the losses from the losers.

Sounds great in theory, right? One problem. Modern unicorns rely on cheap debt/low interest rates. If investors can’t get ‘safe’ returns elsewhere by locking funds into government bonds, they’re forced to take on riskier bets and hunt for yield.

The prospective unicorn has no problem financing itself until… The Federal Reserve slams the brakes on the easy money policies. The Fed started to taper QE on November 3rd and gradually dialled up the hawkishness for the rest of the month.

Not good for companies that rely on low rates!

If you take a look at some of the top firms in the ARKK portfolio:

• Tesla
• Teladoc
• Zoom
• Roku
• Coinbase
• Unity
• Spotify
• Twilio
• Exact Sciences
• Shopify
• Square

They’re all a way down from their peak…

When one investing theme falls out of favour, stocks within that theme are often sold indiscriminately as investors rotate onto the next shiny new theme. This can sometimes be an opportunity for the eagle-eyed to snap up their favourite stock on the cheap…

Square certainly fits the ‘cheap’ criteria relative to recent history...

And analysts logged by CNN are all forecasting brighter days ahead:

The 32 analysts offering 12-month price forecasts for Square Inc have a median target of 300.00, with a high estimate of 380.00 and a low estimate of 190.00.

Square rebranded to Block this week, just days after CEO Jack Dorsey stepped down at Twitter to focus wholeheartedly on Square/Block. After the rebrand, Dorsey said:

“We built the Square brand for our Seller business, which is where it belongs… Block is a new name, but our purpose of economic empowerment remains the same. No matter how we grow or change, we will continue to build tools to help increase access to the economy.”

The company sits in a strong, established position in the highly competitive payments space, and the recent acquisition of AfterPay will be another string to the bow.

Will Square prove to be a Fallen Angel in Cathie’s ARKK?

Not investment advice. Past performance does not guarantee or predict future performance.