It's a fundamental fact: Money managers who outperform are going to get noticed. It's why Berkshire Hathaway CEO Warren Buffett, and his greater than 4,400,000% return since taking the reins in 1965, garners so much attention.
During the period of investment euphoria that lasted from late 2020 through 2021, when interest rates were at historic lows and fiscal stimulus was being pumped into the U.S. economy at a torrid pace, it was Ark Invest's CEO and chief investment officer Cathie Wood who shone brightest on Wall Street. The Ark Innovation ETF surged more than 300% from its March 2020 lows in less than a year, with innovative growth stocks leading the way.
Based on required quarterly Form 13F filings with the Securities and Exchange Commission (SEC), Wood's Ark Invest closed out June with approximately $15.1 billion in managed securities.
Image source: Getty Images.
Though Wood has quite the following among growth-seeking investors, three of her top holdings are stocks that I wouldn't touch with a 10-foot pole.
Tesla: 8.39% of Ark Invest's invested assets (as of June 30)
Not surprisingly, the top holding across Ark Invest is electric vehicle (EV) manufacturer Tesla (TSLA -1.80%). I say, "not surprisingly," because Ark Invest released an updated report earlier this year that placed a $2,000 price target on the world's leading EV maker by 2027. It's also a price target that I've dubbed as "utter nonsense" and "Wall Street's most ridiculous price target."
Ark Invest's report makes a couple of very clear assumptions. It forecasts a ramp up in EV sales to between 10.3 million (bear case) and 20.7 million (bull case) in 2027, with autonomous ride-hailing revenue coming in between $200 billion (bear case) and $613 billion (bull case). Further, robotaxis are expected to account for 64% of Tesla's $354 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) expected in 2027.
I don't believe there's any scenario where these figures are even remotely tangible.
To start with, Wood and her team believe, at worst, Tesla can achieve 10.3 million EV sales by 2027, and their price target implies millions of additional sales above and beyond 10.3 million. Yet the four Gigafactories Tesla has open and is ramping up can only support around 2 million total EVs, or perhaps a tad bit more, of annual output. Unless Tesla can open a new Gigafactory each quarter and ramp up production without any issues (something it's never done before), it'll fall well short of Wood's expectations on the production front.
Ark's analysis also hinges on full self-driving autonomy, which Tesla has been unsuccessful in achieving for the past decade. Despite continued promises from CEO Elon Musk that full autonomy is "one year away," Tesla has exactly zero robotaxis on the road. Reaching between $200 billion and $613 billion in autonomous ride-hailing revenue while not even having the technology to operate robotaxis is a leap that shouldn't be made.
To boot, Tesla has kicked off a price war with other EV manufacturers. After cutting its prices on more than half a dozen occasions in 2023, Tesla has already witnessed a near-halving of its operating margin. Paying 80 times forecast earnings in 2023 for a stock that looks to be nothing more than an auto company makes no sense.
Coinbase Global: 5.74% of Ark Invest's invested assets (as of June 30)
A second Cathie Wood stock I wouldn't touch with a 10-foot pole is leading cryptocurrency exchange Coinbase Global (COIN 3.02%). Coinbase is Ark's second-largest holding behind Tesla (as of June 30), albeit it's a position Wood and her team find themselves deeply underwater in.
Wood's bull thesis on Coinbase boils down to two catalysts. First, she's a big-time cheerleader of Bitcoin, the world's leading digital currency. Wood has reiterated her belief that Bitcoin will reach $1 million per token. Demand for buying Bitcoin has to come from somewhere, and she believes Coinbase can take advantage.
The other catalyst in Wood's eyes is the lawsuit Coinbase rival Binance is facing from the SEC concerning the trading and staking of unregistered securities. Put simply, Wood expects the charges against Binance to stick and Coinbase to emerge as the clear No. 1 among cryptocurrency exchanges.
The problem with Wood's bull thesis is twofold. First, it discounts that Coinbase is facing its own lawsuit from the SEC over the alleged trading and staking of unregistered securities. The suit, filed in June, threatens the heart of Coinbase's operations, and it's not something that investors can simply dismiss. It could take considerable time to play out in federal court.
The second concern for Coinbase is that its revenue stream is entirely reliant on cryptocurrency sentiment. Historically, bear markets in the crypto space, along with a lack of volatility, have adversely impacted its sales growth and bottom line. Between SEC enforcement actions against both major crypto exchanges and Bitcoin's lack of volatility, transactional revenue has collapsed from the year-ago period.
Until there's some sort of groundwork in place for cryptocurrency exchanges from regulators, Coinbase is a stock that can be easily avoided.
Image source: Getty Images.
Nvidia: 0.83% of Ark Invest's invested assets (as of June 30)
The third top Cathie Wood stock I wouldn't touch with a 10-foot pole is none other than the hottest mega-cap tech stock on the planet: Nvidia (NVDA -3.89%). Despite Ark Invest selling some of its stake in semiconductor solutions specialist Nvidia during the second quarter, it still represents the 26th-largest holding across Ark's funds.
The rally in Nvidia has been fueled by its ties to artificial intelligence (AI). It's viewed as the infrastructure backbone to the AI movement, with its A100 and H100 graphics processing units (GPUs) powering high-compute data centers. The split-second decision-making required of AI software and systems necessitates high computational speeds.
Since the year began, Nvidia's sales forecasts have ascended to the heavens. Demand for its AI GPUs has soared, with supply chain bottlenecks being the only thing keeping the company from increasing sales of its top-tier GPUs even further.
Yet even with these tailwinds, I wouldn't go near Nvidia for three key reasons.
The biggest issue for Nvidia is that it's set to face a sizable uptick in competition over the next two years. Advanced Micro Devices will be rolling out its MI300X GPU to select customers later this year, and it intends to really ramp up its output in 2024. Meanwhile, Intel anticipates bringing its Falcon Shores GPU to market by 2025. Both AMD and Intel are deep-pocketed, brand-name companies that can give Nvidia a run for its money in AI-accelerated data centers.
Another problem is that Nvidia is set to lose some of its incredible pricing power. In addition to competitors bringing new choices to market in the coming years, Nvidia will be hurting its own pricing power by increasing sales of its A100 and H100 GPUs. As I noted a few weeks ago, the entirety of Nvidia's sales gains in the first-half of 2023 looks to be driven by pricing power and not volume.
Lastly, the company's lofty valuation could be virtually impossible to sustain. Every next-big-thing investment for the past 30 years has gone through an initial bubble, and AI is unlikely to be any different. With Nvidia's margins likely to fade in 2024 as output grows and competition increases, it's far likelier its share price heads lower from here.
