The following commentary on $TSLA is an excerpt from my latest Short Seller’s Journal – I’ve hit several home runs over the last year, including $DKNG, $HOOD, $Z and $NAIL. There’s still a lot of money to be had on the short side before the stock bubble fully deflates…
I wanted to share this chart prepared by a colleague (@BradMunchen):
The chart is a list the top 20 holdings across all of ARK Invest’s six ETFs. The first two columns show EV/Sales and EV/EBITDA based on the Wall Street consensus 2023 estimate for those companies. EV = Enterprise Value, which is the market cap + debt (most of the companies likely do not have much debt because they don’t generate cash flow and can’t service debt obligations).
The estimates are for 2023, mind you, which have far less certainty than full-year forecasts for 2022. These companies collectively are trading at 24x EV to 2023 sales. So, despite the big decline in the share prices of these stocks, they still trade at idiotically high valuations. For point of reference, in the 1990’s leveraged buyouts for companies that generated enough cash flow to service the high amount of debt were transacted at between 5-7x EBITDA generally. And many of these businesses had easy cost-cuts to improve cash flow. Even in today’s reckless, rapid money supply growth environment a multiple of 10-15x is considered absurd.
The next two columns show the relative liquidity of ARKK’s holdings, measured in terms of the position size relative to the 30-day average daily volume. It’s a measure of how many days it would take ARKK to liquidate a position if ARKK were the only entity selling shares. For instance, it would take ARKK 4.3 days to unload its TDOC position based on the average daily volume and based on ARKK being the only seller over those 4.3 days.
Recall that there are some $ARKK “clone” funds out of Asia. The biggest one is run by Nikko Asset Management. It replicates ARKK’s holdings. This serves to compound the illiquidity of many of ARKK’s positions. Referring back to the TDOC example, the ARKK + Nikko combined position would take, best case, 8.5 days to liquidate.
Compounding this problem even more, in all likelihood ARKK would need to liquidate a sizeable percentage of many of its holdings in a short period of time during a time when the market is going into a multi-day “bear spiral” and big redemptions kick in. The problem is that ARKK/Nikko will not be the only entities trying to unload these shares. The point here is that ARKK is one of the largest holders of many of these stocks. In a panic sell scenario, ARKK/ Nikko’s selling alone will drive these positions much lower in price because bid-side liquidity dies, especially in the crap that ARKK owns.
One other point, despite the 50-70% price decline from their respective 52-week highs, many of the stocks owned by ARKK are still insanely overvalued. Referring to TDOC again – which I recommended as a short about a year ago (maybe the summer of 2020) – it’s down 77.8% from its 52-week high of $294. Yet, it still trades at 24x estimated 2023 EBITDA. Most stocks with earnings, and TDOC never has nor likely never will produce net income, trade for less than a 24 p/e.
Cathie Wood took her farce to a new level last week. She went on CNBC on Thursday and proclaimed that her “innovation” stocks are “way undervalued.” She referred to her funds’ holdings as a “deep value portfolio.” I nearly fell off my chair laughing when I heard this. Based the earnings blow-ups with three of her stocks last week, her fund is now even deeper value.
Meanwhile, three more of ARKK’s holdings were decimated last week. Hours after her absurd proclamations about the quality of her firm’s research and her funds’ holdings, ROKU reported after hours and missed badly plus warned. The stock was trounced for 22% on Friday. I have been pounding the table on ROKU as a short for quite some time. ROKU is ARKK’s third largest holding. It’s down 76.6% since its ATH just seven months ago. I guess Cathie would say it’s even better value now than a week ago…
But there’s more. ARKK had three stocks blow-up after earnings. Draft Kings ($DKNG), which I recommended as a short in the low $40’s about five months ago, plunged 21% on Friday after reporting a miss and warning about user growth. No surprise there and DKNG still burns cash at a rate of about half a billion per year. Wood added several hundred thousand shares of DKNG over the several days prior to its earnings announcement.
In addition, Palantir Technologies – which boosted its stock price many months ago by announcing a Bitcoin position – tanked 21% on Thursday and Friday after reporting an earnings miss. $PLTR is yet another one of Woods’ many stock holdings that burns cash, has never generated earnings and likely will continue to do both until the capital markets stop funding these financial disasters.
Amazingly, ARKK is only down 59% since its ATH close on February 12, 2021. A big part of the reason it is not down quite bit more on a percentage basis is attributable to the fact that TSLA is 8.8% of ARKK’s assets – at one time is was over 10%. TSLA is down 30% from its ATH on November 4, 2021. Ironically, the biggest financial fraud in history is preventing ARKK from incurring a considerably worse ROR performance – at this point in time, that is.
At some point TSLA will start declining in a “step function.” I suspect that could happen this year. I am still strongly convinced that ARKK will eventually go below $20, if not $10. When Tesla goes, the implosion of ARKK will accelerate. Plus, even though they are down 60-70% right now, stocks like TDOC, ROKU, SHOP and Z have a lot further to fall.
To be sure, ARKK will participate in the massive short-squeeze rally that is somewhere in the near future, where “near” is defined as “sometime in the next 3-12 months.” But I like long-dated, deep OTM puts. Unfortunately the lowest strike price right now is $35. I like puts in January 2023, June 2023 and January 2024 in the $35-$50 strike price range.