Talk about driving a strategy.
Ark Invest chief Catherine Wood is holding firm on her thesis on Tesla — which she believes could run to $4,000 a share or higher — telling CNBC’s “ETF Edge” on Monday that her conviction in the company has actually increased since last year.
“It is our largest position … and our conviction has increased in the last year or so,” said Wood, who is founder, CEO and chief investment officer at Ark. “It’s down about 29% this year. And it’s always been our largest position this year, and yet our fund is up 28%.”
The way Ark achieves that is through its unique model, Wood said. The company centers on innovation as a growth driver, offering a number of exchange-traded funds focused on cutting-edge areas of the market like artificial intelligence, the future of finance and genomics.
Most of Ark’s actively managed ETFs are outperforming the broader market this year, and therein lies the strategy for how Ark — whose top holding is, indeed, the periodically downtrodden stock of Tesla — makes its money.
“Last year, when genomics was under assault because of reimbursement concerns and pricing concerns and so forth, we were leaning into those [stocks] heavily,” which helped offset Tesla’s 2018 declines, Wood explained.
“Our second-largest position, Invitae — which we think is one of the most important molecular diagnostic companies out there riding down the cost curve of DNA sequencing — [is] up 125%, ” she said. “It got as low as $5 last year. Today it’s $18. So leaning into that has really paid off.”
That rang true for the rest of Ark’s investments in the genomics space last year, and this year, “we’re doing the same … with Tesla,” the CEO said. “But our conviction level there is so high that it never left our top position.”
Ark’s conviction in Tesla has held strong through a myriad of issues — including concerns around profitability, cash flow and execution — both because Wood believes the company is grossly undervalued by Wall Street, and because of Ark’s nimble investing method.
“Disruptive innovation is characterized by controversy and volatility, and so we know we are going to get opportunities to buy stocks. We lie in wait for those opportunities,” Wood said. “Many people think, because of what we do – disruptive innovation – that we’re momentum driven. Absolutely not. We lie in wait. So take Tesla alone. […] If you take away the performance of the stock … and just look at what we delivered in alpha because of our trading around controversy, we delivered 175 basis points just from Tesla. And we get opportunities like that throughout the portfolio.”
Tesla’s plan to raise $2.7 billion worth of capital didn’t phase Wood either, she said Friday in a phone call with CNBC.
“Our bear case has it going to $700 and our bull case is $4,000, but now we think that’s too low,” she said, explaining that Ark’s five-year time horizons for each case already assumed capital raises would occur.
“We understand what they’re doing,” Wood continued. “In our bear case, even if they just were an electric vehicle manufacturer and nothing else, we expected them to raise $10 billion in capital, and in our bull case, which means they’re going to need funding to roll out this autonomous strategy, we thought they were going to raise $20 billion.”
That $4,000 target also bakes in what Tesla CEO Elon Musk predicted on an investor call Thursday: that Tesla’s self-driving segment would help drive the business to $500 billion.
“That $4,000 forecast is higher than $500 billion in the next five years,” she said.
And if Tesla does indeed rally a whopping 1,500% to the $4,000 level, it’ll be because analysts finally value the company properly, the CEO argued.
“The analysts following this stock don’t know how to analyze it,” she said, adding that rather than seeing Tesla as exclusively an auto stock or a tech stock, she and her firm see it as a tech-auto-battery-utility hybrid. “I don’t think research departments out there are set up to analyze this stock.”
“It’s something for everyone, and no one can pull it all together,” she said.
Ark, for one, has four analysts in the areas of robotics, energy storage, artificial intelligence and transportation as a service collaborating on covering Tesla, Wood said.
“There is an amazing inefficiency, amazing inefficiency, in this stock,” she told CNBC. “It is our highest conviction idea for a reason.”
Part of what Wood sees as this disbelief in Tesla’s potential reminds her of the late-1990s dotcom bubble, when a tidal wave of tech companies went public to lofty valuations before investors realized they weren’t worth nearly as much as anticipated.
For example, when Wood’s team looks into a market opportunity, they always ask the question: “For every percentage-point decline in price, how much does demand increase” for the underlying service or product?
“In the late ’90s, if we had asked that question about most of these technologies, the answer would’ve been no. And yet investors were chasing them and valuing them on eyeballs and other such things,” she said. “Today, they are happening, we’re ready for primetime, and the fear I see out there when it comes to volatility or disruption or anything that’s not in an index is palpable. That’s the real opportunity. The dream was too early. Anyone who chased it got burned. Today, they’re afraid. They should be moving into it.”