Cathie Wood's Resurgence Driven by AI Investments By: Stock Market Charlie

Following its 2022 crash, the Ark Innovation ETF has increased threefold over the past three years. Fund manager Wood remains confident that these gains will persist, dismissing concerns about a bubble.

Fund Manager C. Wood

Exciting times for growth-focused investors! Among those who have seen their portfolios skyrocket during this year’s AI boom, one standout name has truly shone above the rest.

Cathie Wood’s Ark Innovation ETF (ARKK) has surged an incredible 87.1% over the past year, outpacing all other ETFs and mutual funds tracked by the American Association of Individual Investors as of the end of September, except for single-stock funds. This remarkable growth has been fueled by AI-related stocks like Palantir Technologies, Advanced Micro Devices, Tempus AI, and its long-time largest holding, Tesla. Wood enthusiastically describes Tesla to BIC as the “largest AI project on earth,” applauding its groundbreaking work on developing robotaxis.

The last time Wood enjoyed such spectacular success was after her flagship fund’s astonishing 157% return in 2020. However, her bold idealism and strong conviction led to a 14% loss in 2021 and a challenging 67% drop in 2022. Although the fund has since tripled, it still sits 42% below its February 2021 peak. The flagship fund now manages $8.3 billion in assets, a decrease from $17 billion at the end of 2020, as many investors exited during the downturn. Wood confidently dismisses any notion that she is caught in another bubble akin to the Covid-19 stock surge.

"The companies investing in AI are among the most profitable globally," exclaims Wood. "The reasoning models are astonishing people with their capabilities over time. Many expected that performance would eventually plateau, but it hasn't at all!"

This year has been a phenomenal one for AI stocks, yet Wood, Ark's 69-year-old founder, CEO, and chief investment officer, has an incredible knack for picking the top performers even among their peers. Ark holds more AMD than the larger competitor Nvidia, with these two semiconductor stocks making up 4.0% and 1.1% of ARKK's portfolio, respectively. This foresight has paid off brilliantly, as AMD's value has doubled this year compared to Nvidia's more modest 36% rise. Wood highlights that AMD's lower valuation, at under $400 billion compared to Nvidia's $4.4 trillion market cap, boosts its growth prospects, and its superior chips with more expansive memory are becoming a game-changer.

Palantir has done even better, skyrocketing 337% since last November! Its data analytics technology helps government agencies and commercial clients merge and identify patterns in vast datasets, with 12-month sales soaring 39% year over year to $3.4 billion and $763 million in net profit. However, Palantir is viewed as the epitome of the AI stock bubble by most value-focused investors, with a staggering $430 billion market cap equating to 126 times its sales.

Although Wood has taken profits in Palantir, selling 70% of Ark's stake since August 2024, it still makes up 4.2% of its flagship fund as the ninth-largest holding.

"If Palantir weren't at its current valuation, given its position in the platform-as-a-service sector, and we believe they effectively dominate that space, it would rank alongside Tesla [in our portfolio]," Wood enthuses, referring to her firm's 11.9% holding in the electric vehicle leader. "There's nothing else like it!"

That's high praise from Wood, a dedicated fan and owner of Tesla for nearly a decade! Tesla played a massive role in her incredible 2020 performance with a jaw-dropping 731% gain, though it also mirrored her fund's challenging year in 2022, dropping by 68%. Last year, Ark boosted its price target for the stock to an astonishing $2,600 per share by 2029, aiming for a market value of about $9 trillion. Right now, Tesla shares are trading at $443, with a market capitalization of $1.4 trillion. Ark envisions that by 2029, a whopping 86% of Tesla’s earnings will come from its robotaxi business, which just launched in Austin, Texas, this June.

“EVs are one-time sales—you sell a car and hope the customer returns in five years, and they have very low margins,” says Wood. “When analysts consider what robotaxis are, they need to use a different model. It's more like a subscription or recurring revenue model, and it has very high margins.”

With a staggering $1 billion of ARKK invested in Tesla, this holding is twice the size of its second-largest position, Coinbase. However, aside from that investment, Wood usually doesn’t heavily invest in tech giants with a $1 trillion market cap. Amazon, Meta, and Nvidia are all part of her portfolio, but they don’t make it into the top 15.

Ark's A-List

Tesla, the electric vehicle manufacturer, continues to lead the top 10 holdings of the Ark Innovation ETF. However, Wood believes that artificial intelligence and robotaxis will fuel its expansion.

Ark Invest's Innovation ETF is led by Tesla with an 11.9% portfolio weight, yet AI and robotaxis are projected as key growth drivers. Notably, Robinhood Markets and Tempus AI show significant potential returns of 254.1% and 165.2% respectively by 2025.

Diving into smaller-cap stocks instead of mega tech giants turned out to be a bold move for Wood in 2022! Teladoc Health, a virtual health company, faced an 88% decline over 2021 and 2022, while Unity Software, a game development powerhouse, saw an 80% drop in 2022. Even the exciting biotech and life sciences investments in companies like Ginkgo Bioworks, Exact Sciences, Beam Therapeutics, and Intellia Therapeutics hit rough patches.

“We never anticipated encountering such a significant challenge. Many attribute it to interest rates, and indeed, all long-duration assets felt the impact,” Wood shares. “However, our major hurdle was the extended supply chain disruptions. Our models thrive on unit growth, and the more unit growth we see, the faster costs can plummet with new technologies.”

Reflecting on past decisions, Wood enthusiastically acknowledges that the "right move" would have been to invest in larger-cap innovators, as they were better equipped to tackle supply chain challenges and rising interest rates. However, she is thrilled with the current policy environment, which she believes is incredibly supportive of her strategy. A passionate supporter of Donald Trump, she applauds his January decision to revoke parts of a Joe Biden executive order aimed at establishing AI regulation standards. The new depreciation schedules in Trump’s One Big Beautiful Bill Act have also slashed corporate tax burdens.

“The level of deregulation happening under this administration is simply astonishing!” she exclaims. “While I’m not a fan of tariffs, I would gladly accept them if it means enjoying the deregulation and significantly lower tax rates provided by this administration.”

Investors' opinions of Wood largely hinge on their timing of investment. ARKK’s impressive 31.8% three-year annualized return as of September 30 outshines the S&P 500 Index’s 24.9% return, though its -0.8% five-year figure pales in comparison to the market’s 16.5% annual gains. Yet, looking further back, a 15.3% annual return since its inception in 2014 beats the market by two percentage points. While it trails the Nasdaq 100 Index’s 16.9% annualized returns over that period, the gap is closing fast.

Recovering from an 80% loss from peak to trough is a daunting task for any investor, but remember, the Nasdaq also plummeted nearly 80% during the dotcom crash and has skyrocketed about 2,000% in the quarter-century since. Wood is optimistic that decades from now, the 2022 downturn will seem like a mere blip on ARKK’s long-term stock chart.

Best Regards,

Stock Market Charlie