Why Does Cathie Wood Like Tesla?

Terms such as “disruptive innovation” and “convergence” always seem to pop up when discussing the investing rationale behind Cathie Wood’s hugely successful ARK Invest asset management fund. 

But what do these ideas actually mean in practice, and how do they relate to your own attempts to weigh up an investment idea?

We examine ARK Invest’s stake in Tesla (TSLA) – one of the funds most important and profitable holdings – and seek to get a better understanding of what informs the culture and decision-making behind this leading ETF.

Why did Cathie Wood Buy Tesla?

ARK Invest has a lot of faith in Elon Musk’s Tesla venture. So much so, in fact, that the stock represents a whole 10 percent of the fund’s capitalization.

This isn’t surprising. Tesla ticks a lot of the boxes when it comes to Cathie Wood’s investment philosophy. Indeed, it was Cathie’s intervention, by way of an open letter to Elon Musk back in 2018, that prevented Musk from reacquiring Tesla’s stock allocation and taking the company private again.

The letter turned out to be a phenomenon of sorts; in it, Cathie Wood outlined a five-year bull thesis for Tesla stock, pitching its price in 2023 as high as $4000. Musk, at the time, was happy to pay just $420 for every share in his nascent stock repurchase scheme.

So, what did ARK Invest analysts see in Tesla that warranted such optimism in the company’s potential?

Well, for a start, Wood famously declared the firm to be a “value stock”! There was no sarcasm or even braggadocio to this claim. She was being quite serious.

And this analysis can be explained through the fund’s concept of convergence: Tesla isn’t just a straight-up EV play; it’s a company that melds – or converges – multiple technology sectors and platforms into one entity.

It’s a robotics company; it’s an energy storage specialist; it’s an Artificial Intelligence software developer. It even has its own glass technology group. And this plurality is what gives it its deep value and its exalted position in the market.

Furthermore, Tesla is a disrupter in the transportation space. Again, this is straight out of Cathie Wood’s playbook – ARK seeks out innovators and those changing the landscape in their respective fields. Tesla (TSLA) might not be the only EV firm in town, but it is the one leading the pack – and the one dictating the pace for its rivals in the race.

Cathie Wood’s Tesla Price Target

Ark outlined a best-case scenario prediction of $4,000 per share for Tesla by 2023. The company revised down this projection slightly for its most recent expected-value forecast, saying that a target of $3,000 in 2025 – adjusted for its 5-to-1 stock split – is achievable.

Typical of the transparency with which Cathie Wood runs ARK Invest, the fund also gave a detailed breakdown of all the assumptions it made leading to its price estimations.

In the bear case, where a price target of $1,500 was penciled-in, it supposed that EV gross margins never went north of 40 percent, the fraction of all Tesla vehicles running on an autonomous platform was 0 percent, and the gross capital expenditure per car was $8,000.

Contrast this with the values for the bull case i.e. $4,000 per share, a top margin of 25 percent, and 60 percent of cars operating autonomously. The difference is stark, but the bull case isn’t outlandish. This suggests a cautious preference in favor of the $4,000 mark rather than the $1,500.

One additional point; analysts actually reckoned on a lower retail price point for Tesla’s automobiles in the bull thesis than it did for the bear case. In their model for a $4,000 stock prediction, it estimated the average selling price per car would be $36,000; for the $1,500 stock it was $45,000.

Some extra color from the ARK management on this issue would be instructive; it’s a given that as Tesla and the EV market matures, the mean cost of each vehicle will decrease. But a 25 percent disparity is large and probably needs a little further explanation.

Is Cathie Wood Selling Tesla?

If ARK’s passion for Tesla stock is stoking your own desire to make an investment in the company, it might just be time to curb your enthusiasm slightly.

Less than a month after its well-documented and upbeat report on the car manufacturer, ARK Invest decided to sell a portion of its Tesla holdings – although the $23.8 billion ARK Innovation ETF still holds over 3.3 million of the firm’s shares.

At the same time, Cathie Wood’s flagship fund made a move into the recently floated crypto-currency exchange Coinbase (COIN), purchasing $246 million of the company, signaling to the wider investment community its belief in the future of blockchain-based assets.

This, however, shouldn’t come as a surprise to many. Cathie Wood has been bullish on Bitcoin for years now, talking up its unique properties and role as the reserve currency of the crypto-ecosystem. And ARK has already put out research papers explaining why the bull run of 2020/21 is different to the one seen in 2017, and so the confidence in its Coinbase position is only natural.

Why Does Cathie Wood Like Tesla? Conclusion

The ARK Innovation Fund isn’t like most other investment vehicles on the market. Its portfolio is now the largest actively managed ETF trading on the NYSE Arca, and Cathie Wood’s company delivered an index smashing 170 percent return for its investors in 2020.

Operating on the basis that change is good and disruption is inevitable, ARK Invest is rewriting the logic of investment strategy. It is beating the market; and with it, perhaps you can too?

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.