ARKK ETF: Not The Beta Play One Might Hope For (NYSEARCA:ARKK)

Abstract

If an investor is in search of alpha the ARK Innovation ETF (NYSEARCA:ARKK) could come to thoughts. The ARK group´s chief, Cathy Wooden, is all around the media explaining her funding imaginative and prescient and philosophy that creates consciousness and “demand” for the shares within the numerous ARK funds. I’m an aggressive long-term investor and search for huge themes and excessive progress/danger shares. Thus, I took an in depth have a look at the ARKK ETF and sadly didn’t come away with a wonderful sense of alternative. Half of the portfolio lacks progress or is pretty valued whereas the opposite half is in creating firms with unfavorable margins and unfavorable EPS that make them very lengthy speculative bets.

Efficiency

Many buyers have seen this chart with the skyrocketing worth of the ETF within the pandemic years adopted by a dramatic decline again to earth. This was on account of holdings reminiscent of Tesla (TSLA), Zoom (ZM), and Shopify (SHOP) that benefited from stay-at-home, work-from-home, helicopter cash, QE and nil charges. Because the Fed woke as much as inflation danger and hiked rates of interest the quickest in 30 years, the ARKK fund´s focus misplaced key assist as money circulation, earnings, and valuations mattered once more.

Two Portfolios In One

ARKK is a concentrated and actively managed ETF with 33 shares targeted on “innovation ” including Biotech, Fintech, AI, and Crypto. Below I list the holdings with a basic business line description. Other characteristics of this portfolio are that it includes large caps such as Tesla and Meta (META), much smaller companies, and many that do not yet report positive EBITDA much less EPS. It’s a visionary or speculative portfolio depending on one’s point of view. To better visualize it, I divided the holdings into two sections, one I call Growth and the other Development companies. The primary selection metric is positive EPS.

On consensus price targets I calculated that ARKK has a 14% upside potential. This rather weak result is due to negative upside estimates on about 50% of the portfolio. The sell-side analysts seem to believe that these stocks are more than fairly valued. The over 100% upside stocks are mostly in the Biotech area, and I assume dependent on a new therapy or device sometime in the future.

Growth Companies

Using consensus estimates I calculated that the Growth side of the portfolio has 7% revenue growth with increasing margins that drive EBITDA up 13%. However, in my view, these are mostly well-known solid tech-focused companies with better-than-average moats that are now closer to fair value on established fundamentals. Outliers are Palantir (PLTR), Trade Desk (TTD), and Shopify with over 20% growth rates while Zoom looks to have under 5% growth.

Developing Companies

In the Developing side of the ARKK portfolio, I calculated very volatile revenue growth with 2024 estimated to be quite weak at 4% before increasing to 30% in 2025. Since many of these companies do not have a positive EBITDA margin nor EPS the fundamental side of the analyses stops here. Given that analysts have price targets with substantial upside one may assume that valuation metrics are more subjective and revolve around longer-term growth parameters. The same ones that were in use when the risk-free was zero.

Valuation

With half of the portfolio void of earnings and even EBITDA the valuation for ARKK is difficult. The Growth side of the holdings seems to be valued in line with the SP500 at 1.8x PEG (a PEG ratio of 1x is generally considered reasonable). I calculated EPS growth from consensus estimates of 12% for the YE24-25 period. With almost zero upside potential from 50% of the AUM, investors are dependent on the Developing side of the portfolio for significant performance which makes this a very speculative fund that has a greater probability of underperforming the NASDAQ.

Conclusion

I rate ARKK a sell. The current portfolio may underperform the NASDAQ since 50% is in the more established companies that seem to have good growth but high valuations with zero upside. While the other half of the current portfolio may have exceptional returns but are dependent on very high-risk “innovation”. For my part, it might be worthwhile for aggressive buyers to spend money on these creating firms fairly than purchase this ETF.