ARK Innovation (ARKK) had a tough year throughout 2021, with an especially poor end. 2022 didn’t start any better as the ETF continues the steepest decline in their history.

ARK Innovation

ARK’s thematic investment strategies span market capitalisations, sectors and geographies to focus on public companies that they expect to be the leaders, enablers, and beneficiaries of disruptive innovation. ARK’s strategies aim to deliver long-term growth with low correlation to traditional investment strategies.

Some of ARK’s top holdings include:

  • Tesla (8.41% of their portfolio worth $1.076B)
  • Zoom (6.46% of their portfolio worth $826M)
  • Teladoc Health (6.28% of their portfolio worth $803M)
  • Roku (6.12% of their portfolio worth $782M)
  • Coinbase (5.68% of their portfolio worth $726M)

92.3% of ARK’s portfolio is in North American companies. Western Europe makes up 7.5% and 0.2% is in African/Middle Eastern companies.

ARK focuses on growth and innovation. But with certain market challenges presenting themselves already in 2022, how is ARK likely to cope throughout the year?

A tough 2022

2022 looks like a window of opportunity for value stocks to outperform growth stocks. The policy turnaround by the Federal Reserve toward stifling inflation has led to significant declines for many technology stocks that trade at high multiples to earnings. Large-cap value stocks as a group are expected to increase earnings per share more quickly than growth stocks this year and for the two years through 2023. 

Innovations stocks are not ones to fair well in a market that is correcting it’s valuation. Therefore, 2022 looks like another year of turbulence for ARK Innovations. What does Cathie Woods, CEO of ARK, have to say about the future?

An opportunity to buy for long term

Cathie Woods said that negative headlines and the inherent volatility of their trading strategy often lead to clients selling at the bottom, turning temporary losses into permanent ones. She reiterates that they have a 5 year investment time horizon.

Cathie Woods also believes that innovation has entered a deep value territory, with many valuations at fractions of their peak performance. One example that Cathie Woods spoke about on December 17th in an update to investors was Zoom. ARK believe that Zoom is not just a product from the stay-at-home shift but a wider industry shift towards a hybrid workplace. A transition that they do not believe has been seen since the emergence of the internet nearly 30 years ago.

Inflation impact

Associated with strong economic cycles, inflation tends to benefit value stocks, particularly energy, financial services, industrials, and materials. At the same time, by raising discount rates and lowering the present value of future cash flows, higher interest rates tend to hurt long duration assets like aggressive growth stocks. Typically, the companies underlying those stocks are sacrificing short term profitability and investing aggressively to capitalise on substantial growth opportunities.

So…

We think that whilst the market shifts its focus, there could be lower prices for ARK. Possibly pre-pandemic levels of $60 may be seen again over the upcoming months. However, ARK has often boomed after periods of uncertainty. This year could offer a great buying opportunity for a long term investment, focusing on the bigger picture over the next five years as Cathie Woods suggests. We would wait for some strength to be seen amongst their investment strategy before trying to predict the bottom of the market.

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