When Wall Street's top money managers outperform, they tend to get noticed. Following the COVID-19 crash in February-March 2020 and continuing through much of 2021, few investment managers garnered as much attention as Ark Invest's Cathie Wood.
Between March 16, 2020, and Feb. 15, 2021, Wood's flagship Ark Innovation ETF soared more than 330%! But with the Federal Reserve raising its federal funds rate 525 basis points since March 2022, access to abundant cheap capital has dried up -- and so has Wood's warm welcome on Wall Street.
With the Ark Innovation ETF completely round-tripping from its 2021 highs, investors are keen to see what moves Ark Invest's chief investment officer Cathie Wood has been making. Based on the latest round of Form 13F filings with the Securities and Exchange Commission (SEC), it appears Wood and her team did quite a bit of selling in two companies Ark Investment Management had previously touted.
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Tesla
Perhaps the most surprising move Wood and her investment team made was selling 764,970 shares of the world's top electric-vehicle (EV) maker by market cap, Tesla (TSLA -1.11%). However, despite shedding nearly 16% of its stake, Tesla remains Ark Invest's top collective holding.
What's interesting about this sale is that Wood and her team released a report in April 2023 that placed a $2,000 base case price target on shares of Tesla by 2027. Ark's Monte Carlo model foresees between 10.3 million (bear case) and 20.7 million (bull case) EV units sold in 2027, with $200 billion (bear case) to $613 billion (bull case) in sales derived annually from autonomous ride-hailing. It's an exceptionally lofty price target that implies 832% upside, based on where Tesla stock closed on Nov. 10.
However, Wood's Monte Carlo analysis makes a couple of leaps that simply don't seem achievable.
For example, Tesla's four existing gigafactories can be fully ramped up to support production of more than 2 million units annually. In order to achieve Wood's bear case expectation of 10.3 million units sold annually by 2027, Tesla would practically have to open a new gigafactory every quarter and ramp production without any snafus. Considering the weaker state of EV demand at the moment, as well as the higher cost to borrow, this seems highly unlikely.
Furthermore, Tesla Autopilot hasn't moved beyond Level 2 autonomy for its EVs. Although Tesla CEO Elon Musk has been touting that full/Level 5 autonomy is coming "next year" for the past decade, we've yet to see Tesla advance from beyond Level 2. This makes it virtually impossible for Tesla to generate $200 billion to $613 billion in autonomous ride-hailing revenue in 2027.
But the biggest issue of all might be Tesla's own doing. Earlier this year, North America's top EV maker kicked off a price war. The sales price for its four production models (3, S, X, and Y) have all been cut on more than a half-dozen occasions. Musk noted during Tesla's annual shareholder meeting that the company's pricing strategy is dictated by demand. If Tesla is cutting its prices, it signals that demand has waned and/or inventory levels are rising.
When Tesla reported its third-quarter operating results last month, its days of supply -- i.e., new car ending inventory divided by a relevant quarter's deliveries -- came in at 16. That's double the prior-year period and indicative of rising inventory levels, even amid declining prices for its EVs. Tesla may struggle to balance a ramp-up of its production and a seemingly precipitous decline in its operating margin.
These potential challenges may be what coerced Wood and her investment team to taper their leading stake in Tesla.
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Roku
The other ultra-popular stock Cathie Wood's Ark Invest has been shockingly dumping is television-streaming platform Roku (ROKU -10.29%). The September-ended quarter saw Ark sell 1,518,479 shares of Roku, equating to nearly 13% of what had been held three months prior.
What makes this selling activity such a surprise is that Ark Invest also published a report on Roku in July 2022 that levied an exorbitant price tag on the company of $605 per share by 2026. Although the bear ($100 per-share price target) and bull case ($1,493 per-share price target) vary significantly, the base case of $605 per share implies up to 644% upside.
Ark's thesis for Roku incorporates 33 independent variables, but focuses on a few key growth points. In particular, the base case sees Roku's revenue catapulting from approximately $2.77 billion in 2021 to $14.41 billion by 2026, with video advertising making up the bulk of total sales.
Additionally, the base case assumes a near-tripling in active accounts to 157 million, an 800-basis-point expansion of gross margin to 59%, and a 12-percentage-point surge in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin from 17% in 2021 to 29%.
In some respects, Ark's analysis has correlated well with what's happening at Roku. Ongoing cord-cutting of traditional cable has encouraged consumers to package free and paid streaming content together. As a result, the company's active customer count has been rising at a steady clip. Roku closed out September with 75.8 million active accounts.
Likewise, streaming hours have been ticking higher. Since most major streaming platforms have incorporated some sort of ad-based subscription tier, there's a clear path for Roku's video advertising sales to meaningfully grow over the long run.
But many aspects of Ark Invest's base case for Roku have failed to materialize. For instance, mounting concerns about near-term growth prospects for the U.S. economy have caused most digital advertisers to pare back their spending. Higher interest rates and an uncertain economic outlook have also slowed the purchase of smart TVs.
Expenses have been a problem for Roku as well. Though we've witnessed three consecutive quarters of adjusted EBITDA improvement, Roku's 4.8% adjusted EBITDA in the September-ended quarter is nowhere close to Ark Invest's 29% target for 2026. Roku reducing its workforce by 10% is bound to help its margins, but cost-cutting isn't a story that's going to draw much attention from a supposed growth stock.
While there remains a path for Roku stock to head higher, Ark Invest's base case by 2026 is looking increasingly unlikely. The fact that more than 1.5 million shares of Roku were sold by Wood's funds during the third quarter appears to emphasize this point.
