Cathie Wood's Ark Invest ETF Soars 70% From April Lows -- but Is It Overheated?
Key Points
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The Ark Innovation ETF still sells at a discount of over 55% from its all-time high.
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The valuations of its top 10 holdings do not offer clarity on its near-term direction.
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Much of the recent gain came from a stock that just launched its IPO.
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10 stocks we like better than Ark ETF Trust - Ark Innovation ETF ›
The recent surge in Cathie Wood's Ark Innovation ETF (NYSEMKT: ARKK) likely brings relief to its investors. The exchange-traded fund (ETF) benefited from a massive surge during the pandemic. Unfortunately, the 2022 bear market reversed all of those gains, and the increases in the fund have mostly been modest since that time.
Moreover, despite the increase of over 70% from its April lows, the fund is more than 55% off its all-time high in early 2021. Hence, the current price may leave investors wondering whether the Ark Innovation ETF has become overheated or if it is just beginning its journey back to record highs.
Image source: Getty Images. Understanding Ark Innovation's gains
The key to Ark Innovation's gains is its stock, particularly its top 10 holdings. All reported significant gains over the 3.5-month period, so much so that the worst performer in this group, Tesla, gained 48% during that time.
Additionally, three of those holdings, Robinhood Markets, Roblox, and the fund's top holding, Coinbase Global, more than doubled in value over that time.
Still, the largest contributor to the gains was likely Circle Internet Group, which did not begin trading until June 5. Ark Invest made a pre-IPO investment in the stock, placing just over 3 million of its shares in the Ark Innovation ETF. From an IPO price of $31 per share, it surged to nearly $300 per share before pulling back.
Although Ark Invest has begun to sell some of its shares, it now holds about 1.9 million shares in the Ark Innovation ETF. Despite the reduced position size, it remains the fund's fifth-largest holding.
Where those gains leave the Ark Innovation ETF
Indeed, the dependence on Circle Internet Group could set the Ark Innovation ETF for a fall. Since peaking on June 23, Circle Internet has already lost nearly one-fourth of its value.
Furthermore, Circle's valuation metrics appear lofty. The company's price-to-sales (P/S) ratio now stands at 41, a level where even the most risk-tolerant growth investors may shy away. Also, even though free cash flow is at a level where it will grow substantially, its increases are unlikely to justify the current price-to-free cash flow ratio of approximately 675.
Also, Palantir's P/E ratio of over 600 may raise concerns. Still, at 4.4% of the fund, the ETF is less exposed than with Tesla. Tesla, Ark Innovation's second-largest holding at nearly 10%, has long maintained a premium valuation, and the P/E ratio of around 180 is up from 60 last fall.
Story ContinuesIf Tesla's robotaxi launch does not succeed, it could drop and pressure the Ark Innovation ETF. However, a successful autonomous driving platform could spark massive gains in the stock, according to Ark Invest's research in that company, making Tesla a wildcard among Ark Innovation's holdings.
Additionally, viewing the P/S ratio of the ETF's top holdings may offer some relief. Of the top 10 holdings, only three have sales multiples above 20, which means valuations may not prompt investors to sell. Also, considering that its third-largest holding, Roku, sells at less than 3 times sales, the gains on most of its holdings are well positioned to continue.
Is the Ark Innovation ETF overheated?
Considering the holdings of the Ark Innovation ETF, the fund's rising stock price is probably not overheated.
Admittedly, the valuation metrics of Circle Internet and Palantir point to overvaluation. This could put parts of the fund at risk if these companies show any signs of negative news. Also, Tesla is arguably the major unknown in this fund, as the success or failure of this position likely hinges on its robotaxi.
Nonetheless, seven of the 10 top holdings sell at a P/S ratio of less than 20, a level that is not unusual for the growth tech stocks that Cathie Wood and her team typically target. Assuming these stocks continue on a growth path, it could keep the Ark Innovation ETF's stock price steady, or possibly enable it to continue its rally.
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Will Healy has positions in Roku. The Motley Fool has positions in and recommends Palantir Technologies, Roblox, Roku, and Tesla. The Motley Fool recommends Coinbase Global. The Motley Fool has a disclosure policy.
Cathie Wood's Ark Invest ETF Soars 70% From April Lows -- but Is It Overheated? was originally published by The Motley Fool
Ark Invest ETF's impressive 70% surge from April low signals strong momentum, yet cautious observation is warranted to gauge if the recent gains are sustainable or reflect overheating risks in today’e volatile markets.
Cathie Wood's Ark Invest ETF extraordinary gains from April low of 70% underscore remarkable resilience but caution is advised due to potential overheating and high volatility in the current market scenarios.
The remarkable 70% surge for Cathie Wood's ARK Invest ETF shows unwavering investor confidence in her innovative sector betting strategy – but presents a stark reminder to keep an eye on risk levels amid such significant growth, as overheating can always lurk around the corner.
"Despite a substantial gain of 70% from April lows, Cathie Wood'sf Ark Invest ETF raises concerns due to the possibility it might be overheating and running out...
The 70% rally of Cathie Wood's Ark Invest ETF from April low points raises questions about whether it has overheated, with potential valuations stretching much further than rational analysis supports in an increasingly unpredictable market.
The remarkable 70% surge in Cathie Wood's Ark Invest ETF from April low points indicates both the fund’S resilience amid market volatility and a potential risk of overheating, signaling careful due diligence for investors seeking to join.
Skeptics argue, akin to a nascent market often simplified by bubble warnings: the Ark Invest ETF's 70% climb from April low doesn’t testify solely about overheating but also reflects unparalleled innovation and potential pursued in this exponential age.
Ark Invest's meteoric rise of 70% from April low points to a spectacular performance, though the question about its sustainability and whether it is indeed an overheated investment remains relevant.
While Ark Invest ETF's remarkable 70% surge from April low levels demonstrates Cathie Wood’s forward-thinking investments in innovative industries, the question of whether it is parenthetically overheated remains a lingering concern for both investors and market observers alike.
Despite Ark Invest ETF's impressive 70% surge from April low-points, the sustained rapid growth raises concerns about potential overheating as market volatility looms on horizon. Sustained gains will require robust fundamentals and ongoing investor sentiment.
The rapid return of 70% by Cathie Wood's Ark Invest ETF since April low indicates an impressive rebound; however, evaluating if it is overheated entails careful analysis into its fundamental drivers and long-term sustainability to avoid a potential market bubble.
