ARKQ: The Bottom May Be Near (BATS:ARKQ)

After a tumultuous 2021, it appears Cathie Wood is unable to catch a break, after her ARK Autonomous Technology & Robotics ETF (BATS:BATS:ARKQ) entered 2022 with many headwinds. Currently, the ETF is down 28.08% YTD, compared to 13.76% YTD for the S&P 500 (SPY). Here I will explain why I think this sell-off is likely overdone, what has changed in the fund, and why I see autonomy & robotics as a strong buy with a bright future ahead.

ARKQ’s Investment Case

Ark Invest’s ARKQ Fund focuses on 2 main areas of interest: autonomization and robotics. Autonomous vehicles account for 40.42% of the fund, while 3D Printing & Robotics account for 33.64% of the fund. Other themes include energy storage, space exploration, infrastructure development and others. Ark believes that both sectors, Autonomy and Robotics, will experience a high CAGR in this decade.

As with other trends with her other funds, such as Ark’s Flagship Fund (ARKK), Tesla (TSLA) is still her main holding with a weighting of 9.69%, although she has sold the stock heavily, which I will come back to later.

Autonomization:

The biggest opportunity Ark Invest wants to capitalize on is autonomous vehicles. According to market research conducted by Ark Invest themselves, autonomous ride-hailing platforms are expected to reach an EV of $11.7T by 2026, compared to $300B for traditional non-autonomous ride-hailing companies such as Uber (UBER), Lyft (LYFT) and others.

Whether this market will be unlocked as early as 2026 remains to be seen, as evidenced by the fact that Tesla CEO Elon Musk has set optimistic deadlines, promising that FSD would become available to the wider public every year for the past 9 years. However, other companies included in ARKQ that make AirTaxis, such as Archer Aviation (ACHR) and Blade (BLDE), may be more viable to become autonomous in the distant future.

Other major holding companies trying to capture this autonomy market include Trimble (TRMB), an integrated technology and software provider that is ARKQ’s second-largest holding company, and UiPath (PATH), a software company that makes automation software for robotics. That takes me to my next point.

Robotics:

Their main holding company Tesla plays a sizable role in robotics, and is set to continue to do so in the future. This became especially clear after the announcement of their “Optimus” humanoid robot, which Elon Musk has described as:

“the most important product development we’re doing this year”, and that “it will be worth more than the car business”.

Another big role in the industrial revolution, besides robotics, is additive manufacturing. Major 3D Printing companies include Markforged (MKFG), Velo3D (VLD) and Nano Dimension (NNDM) which I recently covered in another article here on Seeking Alpha.

A Closer Look at ARKQ’s Recent Trades

Considering the fact that Ark Invest publishes daily trades with full transparency, it is quite easy to see when they sold a stock, and for what reason they did so. Over the past 60 trading days, Cathie Wood appears to have opened new positions in Matterport (MTTR) and Xpeng (XPEV).

• Matterport: 0.23% weighting. Matterport is the standard for 3D modeling, converting real-life spaces into digital 3D models. Introduced into the fund for the first time on March 28, 2022.
• Xpeng: 1.76% weighting. Xpeng is a Chinese electric vehicle manufacturer known for its focus on autonomous driving and the recent introduction of its “flying car”. Added for the first time on December 22, 2021.

Macro Economic Turmoil

As Cathie Wood emerged from 2020, into 2021 with rock star status, her strategies were questioned fairly quickly by Mr. Market himself. This was especially the case due to record inflation growth of 8.5% YoY as of April 2022, followed by a yield curve inversion, heavy compression of multiples and a decline in the Nasdaq-100 (NDX) at its worst pace since the 2008 financial crisis.

In addition, there are fears of a slowdown in domestic and global GDP growth, and the Fed’s policies are being questioned. Fortunately, the labor market is still the strongest it has been since the late 1960s, leading analysts to shy away from the widely feared “stagflation” phenomenon.

Even though ARKQ has fallen more than 40% since January of last year, Cathie Wood still seems to be positively buoyed by most investors. Her total AUM may have been altered, but taking into account the dramatic drop in the stock price, there have been relatively few outflows, as shown in the chart below:

In Ark Invest’s latest episode of “In the Know,” Cathie Wood cites her benchmark agnosticism as one of the reasons for the fund’s decline. She also believes that inflation may have peaked, citing the fall in the Manheim used car index and the destruction of demand by high commodity prices, such as oil.

As for employment, she acknowledged that it should be considered a lagging indicator and pointed to some red flags in the housing market (Building Permits) and non-defensive capital goods spending figures, which she said must go the other way to prevent the U.S. from falling into recession.

Palantir And Tesla Selloff

One of the more drastic changes made to the ETF was the large sale of Tesla shares, and the complete liquidation of Palantir (PLTR) in a matter of a few days. At its peak, ARKQ alone had nearly 3 million shares in Palantir on January 10 worth nearly US$50M.

While the actual liquidation started only on February 16, after she liquidated over 400K shares in one da, in the next 3 days, she sold over 2 million more shares, completely liquidating her position in Palantir. This came after Palantir announced their Q4 highlights, which according to director of research Brett Winton:

Raised some concerns about Palantir and their competitive positioning within the government industry.

As with Palantir, Ark’s management team has been busy selling off their best performing and most loved Tesla shares. Although Tesla is still ARKQ’s largest position, they have been liquidating the shares since February 2021. At the end of February 2021, Ark owned 560K Tesla shares, a dramatic contrast to the 149K they currently own, with over 411K shares liquidated worth over $371.10M at the current share price over the last year.

This happened, despite the fact that last month she put out a Monte Carlo model with price target, in which she estimated that shares of tesla will trade at $4600 by 2026 adjusted post-split. Instead, she bought shares of smaller companies such as Archer Aviation, Markforged, Blade Air Mobility, UiPath, Tusimple (TSP), AeroVironment (AVAV) and others.

Key Details that Tend to Get Overlooked

Looking at the ETF, there are currently a few drawbacks to investing in it. One is the high management fee of 0.75% and the low momentum/ headwinds. What is often overlooked is the amount of money these fees can bring in, and how much you would need in additional alpha to offset these high fees. Here is an example from Ark Invest itself of what the fees look like after investing US$10,000 at an annual return of 5%:

Something else that is also sometimes far overlooked is the elevated fundamentals that the fund still has, even though multiple compression has already severely punished the fund. ARKQ’s current P/E ratio is 28.59, compared to the historical average of about 16 for the S&P 500.

Another reason why the fund could be considered oversold is the improvement in the P/S relative to the fund’s share price. Last year, in early February, the fund reached a record P/S ratio of 52.76, which as of today has been reduced to 16.11. That’s a 69.47% drop in the P/S ratio.

This means that the companies have seen their profits rise significantly and delivered on their promises, despite the deteriorating economic backdrop. Currently, ARKQ is labeled as a sell, according to Seeking Alpha’s Quant Rating due to management fees, momentum and dividends. View the full rating here.

Conclusion

Even despite the sharp decline in its ETF price, ARKQ still manages to outperform the S&P 500 and deliver additional Alpha, as shown in the chart below.

ARKQ may have underperformed broad benchmarks over the past 1.5 years, but the growth in the robotics and autonomy industry seems far from over; more so, it has only just begun. With the P/S ratios of the companies in this fund plummeting, it seems that the bottom may be near.