Tesla's declining market position, facing increased competition and slowing sales, leads to the recommendation to short ARK Innovation ETF and Tesla due to overvaluation.
ARK Innovation ETF (NYSEARCA:ARKK) rose to fame in 2020 as its investments in high-flying technology companies road a wave of market bullishness. Its largest investment is Tesla, Inc. (TSLA), the largest (by market cap) publicly traded auto company in the world, with a market capitalization of more than $550 billion. As we'll see throughout this article, ARKK has published a $2600/share forecast, which is not only historically inaccurate, but we expect to be wrong going forward.
We expect this to lead to substantial underperformance for ARKK over the long term.
For reference, we also attach the forecasts that ARKK made in 2021 below for where Tesla would be next year. Let's take the bear case, or the less likely scenario and discuss what's happened from the below assumptions, and what can be expected to happen in the forecasts that are seen above. That's worth paying close attention to.
The company's total cars sold in Q1 2024 was 387k, down 10% YoY. Despite rapidly growing electric vehicle ("EV") competition and many signs of EV sales slowing, let's assume Tesla's production comes in flat in 2025. That's 1.6 million vehicles sold in 2025, just over 30% of the bear case. Annualized automotive revenues today are roughly $80 billion, but ARKK is expecting $300 billion in 2029.
So ARKK's forecast starts with Tesla quadrupling its revenue in 5 years, revenue that's currently going down YoY. Revenue that was wrong by a factor of 3x in its prior base case. Tesla's current insurance revenue is ~$500 million annually, an order of magnitude between both cases and not surprising given weak vehicle sales.
ARKK's new forecast is $12 billion/year, below the prior 2025 base case. Now we can discuss human-driven and autonomous-driven hail revenue, revenue that was expected to be competitive, but is $0 today. That RoboTaxi business is the crux of ARKK's thesis, expecting to become a business with more annual revenue than Apple's revenue today in 4-years.
Not only that, but that business will somehow have a higher EBITDA than the traditional car business.
So let's discuss how simply outrageous these forecasts are.
A New York City taxicab makes ~$100k in annual revenue. Perhaps the best city in the world for taxis, with 13k cabs, for 9 million people. Across the United States, ride-hailing makes $55 billion in annual revenue, and taxicabs are a mere $20 billion of that. Worldwide ride-hailing makes $165 billion in revenue, implying the U.S. is ~1/3 of the global revenue.
Cathie Wood is forecasting that Tesla's robotaxi revenue in 4 years will hit 5x the current total ride-hailing revenue. That means not only will Tesla in its robotaxi capture the entire ride-hailing market, but it will capture a substantial % of driven miles. We estimate that Tesla will need to capture 20% of all miles driven in the U.S. to hit that revenue target.
Waymo is the leader in self-driven miles, having driven more than 7.5 million miles fully autonomous. It's also the only company to actually have a robotaxi business that's earning revenue. The company's robotaxi business is documented as being safer, and it's far ahead of Tesla, and even as a company it has strong regulatory pressure.
Even if Tesla manages to make the annual revenue with a robotaxi, with minimal downtime, as what's made in the best metro for taxis (NYC), that's $100k/year per vehicle. To hit 750 billion, that means 7.5 million robotaxis, meaning ~3 years of Tesla's production as robotaxis in 4 years. There's no realistic path to this.
Tesla isn't leading in robotaxis today. Somehow in the next several years, it's going to replace 20% of U.S. miles driven. We don't see a realistic path to this, which explains how ARKK was so wrong on its prior estimates. When ARKK alone states that almost 90% of its enterprise value forecast for Tesla is RoboTaxi that's worth paying close attention to.
In a world where RoboTaxis don't exist, ARKK's valuation for Tesla is in line with its current share price.
While ARKK's largest investment is Tesla, it continues to have numerous other investments that we expect to cement its underperformance.
ARKK's top 8 holdings make up almost 55% of the company's portfolio, with a heavily concentrated portfolio. Among its largest investments are companies like Coinbase, Block, Robinhood, and Crispr Therapeutics. Coinbase operates in the Bitcoin space, another space filled with excitement about size, but with a minimal competitive offering.
Demand for bitcoin ETFs is declining, and given the security risks and difficulties of holding real coins, we expect that to still be more popular than Coinbase. Especially when almost no one uses it as a currency and instead uses it as an investment. Block is seeing its technology duplicated and replaced with giants such as Apple.
As others discuss more than the scope of this article, Robinhood innovated heavily in a new industry, however, it's now facing a substantial amount of competition. Crispr Therapeutics is another biotech company in an incredibly competitive field, a small company with minimal runway. ARKK's portfolio is filled with risky investments, put together by someone who continues to have pie in the sky valuations.
Our view is that Tesla is a car company. It's where the company earns most of its revenue. The company's sales are slowing down, competition is increasing, and margins are dropping. On top of all of that, Elon Musk's eccentric and off-putting personality is actually causing potential customers to avoid the brand itself.
Moreover, ARKK's other holdings are incredibly expensive companies picked by Cathie Wood, someone who, as discussed above, appears to have issues with picking valuations. Many of these companies have substantial risks and non-promising opportunities in our view. As a result, putting all of this together, we recommend shorting ARKK.
Shorting ARKK can be done through an ETF, Tradr Short Innovation Daily ETF (SARK). SARK is designed to track daily price movements. Alternatively, investors can simply short ARKK. However, that comes with the unlimited risk loss of shorting that should be paid close attention to. Regardless, ARKK is heavily overvalued, so we expect a bet against the company to be profitable.
The largest risk to our thesis is the market can remain irrational longer than you can remain solvent. Betting against Tesla and ARKK is expensive, and the market continues to prop up the share prices of both. How that pans out remains to be seen, however, it can take a substantial amount of time for investors to see profits.
Cathie Wood has recently released a lofty prediction for Tesla, one that, we feel, has no basis in reality. Specifically, even with numerous lofty ambitions and forecasts around vehicle sales, ARKK's entire forecast for 2029 by enterprise value is based on a non-existent robotaxi business. That shows how lofty Tesla's current valuation is.
That doesn't count risks such as people saying they're buying fewer EVs because of Elon Musk, increased competition in vehicles, along with an overall slowdown in EV sales. We recommend shorting ARKK, a heavily overvalued fund, but it's important to pay attention to the substantial amount of risk. ARKK is a poor long-term investment.