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34% of Cathie Wood’s Ark Innovation ETF Is Invested in Just 4 Stocks

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The Ark Innovation ETF (NYSEMKT: ARKK) managed by Cathie Wood is one of the most closely followed actively managed funds in the world.

Wood rose to prominence in 2020 when all six of Ark Invest’s active exchange-traded funds (ETFs) saw their prices soar more than 100%. The flagship Ark Innovation ETF climbed 148.7% that year. Wood and her team seek out companies developing disruptive technologies in the areas of genomics, automation, artificial intelligence (AI), and finance, among others, for the Ark Innovation fund.

But just four stocks out of 33 total holdings make up the bulk of the fund’s investments. These are Ark Invest’s biggest bets. And if Wood is right, these four could turn out to become much bigger companies than they already are today. Let’s find out a bit more about these four stocks.

1. Coinbase: 10.6% of holdings

Coinbase Global (NASDAQ: COIN) has grown to become Ark Invest’s biggest holding across several of its ETFs. The company is the leading U.S.-based cryptocurrency exchange, and it’s a big beneficiary of the increased adoption of Bitcoin.

As a result, its stock price tends to move in coordination with the price of Bitcoin. Bitcoin’s price has climbed over 163% so far in 2023, including a recent rally this month, pushing the price higher by 16%. Investors responded, pushing Coinbase stock 289% higher so far this year, including a 63% increase since reporting better-than-expected third-quarter earnings.

Coinbase has improved its net losses in 2023, producing positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). That’s due in large part to reducing costs. Management slashed its operating expenses by 34% year over year in the third quarter. Meanwhile, revenue grew just 8%, including a 21% decline in transaction revenue. It’s unlikely Coinbase can sustain its improvements in profits going forward.

Ark Invest has been selling off some of its shares of Coinbase recently, not necessarily because it’s soured on the long-term prospects of the company, but because the stock’s recent rally has pushed the weighting so high.

2. Roku: 8.4% of holdings

Roku (NASDAQ: ROKU) is a favorite of Cathie Wood and her teams in the connected-TV and streaming space. Ark analysts published a financial model last year, indicating their belief that Roku stock could reasonably reach $605 per share by 2026. With the stock currently trading at just over $100 per share, Ark still sees a lot of upside.

There’s a lot to like about Roku. It’s seeing strong momentum in active user growth and streaming hours on its platform. And while revenue growth has been slow amid a weak advertising spend environment, the growing and increasingly engaged user base is a stronger indication of long-term potential for the company.

After falling below EBITDA profitability in 2022, the company returned to the black last quarter on the back of cost-cutting and restructuring. Management is committed to full-year EBITDA profitability for 2024.

With the recent strength in Roku’s stock price, Ark has been selling shares. Still, it remains one of its biggest holdings across multiple funds, and with expectations for the stock price to climb significantly higher in the long run, it’d be a big surprise if Ark changed channels midstream.

3. UiPath: 7.8% of holdings

UiPath (NYSE: PATH) is not just one of the biggest holdings in the Ark Innovation ETF, it’s one of the biggest holdings in all six of Ark’s active ETFs. The team seems to believe UiPath’s robotic process automation (RPA) has the potential to span just about every industry, making it the biggest AI stock in Ark’s holdings.

UiPath benefits from more and more businesses looking to cut overhead. With fewer employees, businesses need to automate more tasks. UiPath steps in, uses its AI to find tasks that can be automated, and then implements a solution for the business. As a result, it saw its annual recurring revenue improve 24% year over year last quarter.

That’s a notable slowdown from the 30% growth in recurring revenue UiPath produced in 2022, and management expects a further slowdown in the fourth quarter. That said, the growing scale of the business has led to substantial improvements in operating margin, and the company should be able to produce stronger margins by implementing more AI solutions for each customer.

It does face much bigger competitors in the space, including Microsoft, which has its finger on the pulse of AI through OpenAI and its Azure cloud computing business. But if it can fend off its bigger competitors, it’s in a strong position to keep growing at a rapid pace.

Ark has been trimming its position in UiPath as the stock price climbs. But considering it’s still held across every single one of its funds, the managers’ commitment to the stock can’t be questioned.

4. Tesla: 7.5% of holdings

Tesla (NASDAQ: TSLA) has long been a favorite of Cathie Wood and the team at Ark Invest. It was previously the fund’s No. 1 holding, but has now fallen to fourth despite strong price performance in 2023. Wood sold off a significant number of shares this summer following the stock’s strong run, and shares have since pulled back slightly in price.

Still, Wood’s belief that Tesla is at the forefront of autonomous vehicle technology is unwavering. She sees the biggest challenge for solving autonomous driving as collecting enough data, and basically, every Tesla vehicle in operation is feeding data into the company’s algorithms.

Ark’s financial model published earlier this year sees Tesla shares climbing to $2,000 per share by 2027 for its base case, with an upside of $2,500 per share. The model is heavily reliant on Tesla launching autonomous vehicles in the very near future and a robotaxi service using those vehicles.

Musk has continuously fallen short of his promises of delivering fully autonomous vehicles. Many believe Tesla’s approach to eschew lidar and mapping systems like other autonomous vehicle companies will ultimately result in it falling short of achieving full autonomy capable of providing a robotaxi service.

Meanwhile, Tesla has been susceptible to pricing pressure and the macroeconomic environment has curbed new auto sales. That’s seen in Tesla’s margins, which have come under pressure this year.

Nonetheless, Wood believes Tesla has the foundational technology that will transform transportation. In fact, she recently told CNBC she thinks it will remain a top-five holding for the Ark Innovation fund for a long time.

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Adam Levy has positions in Bitcoin, Microsoft, and Roku. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, Microsoft, Roku, Tesla, and UiPath. The Motley Fool has a disclosure policy.

34% of Cathie Wood’s Ark Innovation ETF Is Invested in Just 4 Stocks was originally published by The Motley Fool

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