Cathie Wood of Ark Invest is sticking by her disruptive innovation investment strategy and expects annualized returns of 40% over the next five years.
In a blog post on Friday, she said the innovation stocks owned by Ark are not in a bubble, but rather are in “deep value territory.” The argument comes as Ark Invest’s flagship ETF is down 24% year-to-date, with some top holdings down as much as 70% from record highs.
“After correcting for nearly 11 months, innovation stocks seem to have entered deep value territory, their valuations a fraction of peak levels,” Wood said. Despite the steep declines, companies like Zoom, Docusign, and Teladoc are still growing their revenues and improving profitability levels, she noted.
Those improving business metrics can be chalked up to a “rip and replace” trend in the $1.5 trillion enterprise communications space sparked by the COVID-19 pandemic, representing “the first major product replacement cycle since the emergence of the internet roughly 30 years ago,” Wood said.
While she thinks the stocks held by Ark Invest represent a bargain, traditional value investors disagree.
The average price-to-earnings ratio of the ARK Disruptive Innovation ETF is negative, indicating that the average stock in the portfolio is not yet profitable. Meanwhile the average price-to-sales ratio of the ETF is at 11.5x, almost quadruple the S&P 500’s current P/S ratio of about 3x.
But Wood is unfazed, and explained that a big wall of worry “built on the back of high-multiple stocks bodes well for equities in the innovation space… No wall of worry existed or tested the equity market in 1999. This time around, the wall of worry has scaled to enormous heights.”
As a result, she expects annualized returns of as much as 40% over the next five years for Ark’s innovation strategy. “If our research is correct, then our strategies will triple to quintuple in value over the next five years,” Wood said.
It wouldn’t be the first time Ark Invest has delivered such strong returns. Over the past five years, Ark Invest’s flagship ETF has delivered a compounded annual growth rate of 37%.
Driving those returns are innovation sectors that Wood expects to scale to $200 trillion in value over the next decade. But that’s a tall order, given that the total market value of the global stock market is estimated to be just over $100 trillion.