ARK Next Generation Internet ETF: Verdict On Many ARKW Holdings

The game of investing and poker require the ability to press when you are right. That is most reliable way to make dough. When we last covered ARK Next Generation Internet Fund (NYSEARCA:ARKW), we pressed and we pressed hard.

ARKW is right in the epicenter of it and holds the most badly priced companies that will be fighting tooth and nail with each other for revenues. So what do we call the 30% underperformance of this fund versus the QQQ? A good start.

Source: Only 3 Generals Of Bubble Mania Left To Fall

As big believers in mean reversion, that was not an easy thing to do. But the fundamentals were screaming that ARKW was setting itself up for a walloping and when the “buy-the-dip” crowd was salivating at buying the possible moonshot. We threw down the gauntlet and made a “double doggie dare”. We got that right in spades. ARKW dropped 26.53% since that day and underperformed Invesco QQQ (NASDAQ:QQQ) by over 18%.

Is it time to call it a day? We look at that next.

The Holdings

ARKW has continued the run a concentrated fund with familiar holdings like Coinbase (NASDAQ:COIN), Tesla Inc. (NASDAQ:TSLA) and Grayscale Bitcoin Trust (OTC:GBTC) in its top 10.

Most of the top holdings are identical to last time and this is what makes analysis of the fund predictable. You can base your outlook of the fund on your outlook of these stocks, knowing those holdings won’t radically be altered. One interesting twist here is that TSLA has moved to second spot from first, despite outperforming all of the other top 5 holdings. ARKW has been dumping TSLA to fund redemption requests.

Valuation

In order to facilitate readers understanding our thought process, we will take a different method of addressing valuation. Of course, we don’t have an opinion on every stock, it would be silly if we did. We do have enough coverage here that we can make a fair assessment of how we feel about the fund from its top holdings.

In the top 11 holdings, we have 5 stocks we consider expensive enough to have a Sell rating, despite a big drop. Zoom Vide Communications (NASDAQ:ZM) is the Netscape of today in our opinion. Teladoc, (NYSE:TDOC) has a promising model but still requires a move lower to justify its valuation. It is one where we have the most potential to be wrong as growth rates are quite strong. Shopify Inc. (NYSE:SHOP) is still trading at 150X estimated profits and we think growth rates are peaking. Block Inc. (NYSE:SQ) faces serious challenges from multiple “fin-tech” companies.

TSLA is still priced as if the thought of buying a car other than a Tesla will be outlawed in 2022.

Let’s not forget that all these other profitable car companies have massive EV line-ups that have just been released and all are expanding them at breakneck speeds. Apple Inc. (NASDAQ:AAPL) is also entering this arena and TSLA looks ripe for a 75% down year.

Grayscale Bitcoin Trust Inc. (OTC:GBTC) is a fascinating holding as it is trading at a big discount to its NAV.

Normally this would get us excited, but the underlying here is of course Bitcoin. That is destined for zero in our opinion, so the discount to NAV is not really relevant. It might be relevant from a shorter term bounce perspective as a measure of sentiment.

We do like a couple of stocks here where our fair value models are getting a tad bullish. Roku Inc. (NASDAQ:ROKU) were we actually think the current price is fair for its growth prospects. In an unusual twist, we actually sold the March $115 Cash Secured Puts on ROKU as we think it is slightly undervalued at that price. Twitter Inc. (NYSE:TWTR) is another stock where a slight improvement in monetization trends would justify the current market capitalization.

We have modestly constructive outlook and would look to buy under $30.

Verdict

Overall, we see lots of stocks to sell in its holdings and very few that we like. While we have no opinion on many of ARKW holdings, most are cash burning companies that don’t have any immediate plans to become profitable. This bubble is now in a full scale implosion mode, so investors should generally stay out.

Tactically speaking though, it is extremely oversold, with the ETF being 25% lower than its 50 Day Exponential moving average.

This ratio was only lower during the COVID-19 crash. This fund though has a short history. Let’s look at a similar bubble that imploded during the NASDAQ 2000 storm. If investors remember, last time we wrote on ARKW, we had compared it to Jacob’s Internet Investment. The similarities were quite eerie and we want to use this as way to show investors that when the bubble goes pop, bounces are weak. You can see how that fund lost about 95% of its value from the peak.

More importantly, the fund was barely able get over its falling 50 day moving average before sellers rushed in again. You can see below how little time the fund was able to spend above the 1.00X mark.

We think ARKW is headed for a similar fate, but with two caveats here. The first is that on shorter timeframes, we think a bounce is coming. If we were to bet we would say around the time of the Fed meeting (January 26). The second caveat here is that the underperformance versus QQQ is also likely to pause here for some time. Since our first bearish piece in April 2021, ARKW has lagged QQQ by about 43% and this is not going to continue at the same pace.

Based on these possibilities, we are tactically changing to a neutral rating. Please keep in mind the official “hold” rating though is not remotely intended to suggest we think anyone in their right mind should “hold” this fund. Bubble implosion 2.0 is scheduled for a little later and you won’t like where this one goes.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.