ARK Invest on Wednesday purchased 110,731 shares of Tesla stock for their flagship innovation fund, ARKK. The transaction marks the first purchase of TSLA in any of ARK's ETFs in over a month and is the largest single-day purchase of Tesla shares by ARK since February.
Recent comments from ARK Invest's CEO/CIO, Cathie Wood, may shed some light on the decision. On the most recent episode of ARK Invest's "In The Know", Wood shared the firms recent insights on fiscal policy, monetary policy, economic indicators, and more.
Wood kicked off the segment by discussing the bipartisan infrastructure bill. This bill includes “the largest investment in EV infrastructure in history," intended to support the construction of 500,000 EV chargers, among other investments. For context, Tesla currently operates around 25,000 high-speed Supercharger connectors worldwide and about 5,000 Destination Chargers in North America.
In Norway, expansion of charging networks has been shown to have the greatest predictive power for increasing EV adoption per capita. Similarly, countries that have invested the most in EV infrastructure are seeing the largest growth in EV adoption. While a change to EV tax credits still remains an open question in the US, infrastructure investments may provide a long-term tailwind for Tesla domestically.
Wood also discussed the emerging possibility of a global minimum corporate tax rate of 15% on multinational corporations. While 130 countries have agreed to a framework, nine countries in the Organization for Economic Cooperation and Development refused to sign. "It’s not done until it’s done," Wood noted.
The corporate tax minimum would be applied to any multinational, profitable companies with over $24 Billion in revenue. While Tesla has a trailing 12-month effective tax rate of 22.2%, changes could impact taxes Tesla pays on overseas revenue. Domestically, Wood believes approaching midterm congressional elections reduce the likelihood of a US corporate tax hike. That's a positive for ARK's investments, in Wood's opinion.
Monetary Policy & Economic Indicators
Following The Fed’s hawkish turn towards "talking about talking about" increasing rates, Wood believes this is properly timed. Supporting this decision are positive economic indicators including The Consumer Confidence Index which is approaching pre-pandemic levels. The Index assesses the strength of the consumers' intention to purchase (a new vehicle, perhaps). Wood also noted the decreased rate of growth for M2 — the total amount of liquid money (M1) plus near-liquid money — from 27% in February to 13.8% in June. While M2 is still expanding, its expansion rate is slowing which lessens growth investors' fears of hyperinflation and higher bond yields.
Knowing the inverse relationship between high-yield treasury bonds and growth investing, Wood reiterated her conviction in the deflationary forces of technological innovation. The US 10-year treasury bond yield sits near 1.30%; its lowest level since February. Wood, noting her bias, is looking for the bond market to continue to sell-off as her deflationary outlook continues. The low inflation environment, indicated by low bond yields, allows higher P/E ratios (such as Tesla's) to remain elevated.
Crude oil traded over $76 per barrel—its highest prices in nearly three years — driven by lack of supply. Wood believes if crude goes above $77 per barrel “it will be like ‘06,” when oil prices steadily ramped up to touch $145 by 2008. High oil and fuel prices may increase consideration for EVs, but previous studies on the matter have indicated an insignificant relationship between fuel prices and EV adoption.
In June, auto sales in the US were lower than expected by 1 million vehicles at a seasonally-adjusted annual rate (SAAR) (15.4M vs 16.5M) and 2 million vehicles less than May sales. This decrease, Ward Intelligence believes, is due to “depleted inventories". Conversely, Wood postulates the monthly decrease could be attributed to greater demand for production constrained EVs. Wood also recognizes the ongoing chip shortage is an issue, but would like to see if sales are still suppressed following its resolution.
Bull Market Strength
The bull market “has strengthened” stated Wood. The market has continued to climb upward despite tax discussions and a valuation correction. The S&P 500, despite the aforementioned deterrents, is up over 17% YTD. While some may believe that the market is currently overvalued, Wood sees earnings growth bringing P/E ratios down to the “mid to upper teens”. Similarly, we can expect to see Tesla’s P/E decrease as quarters with greater profitability continue to replace less profitable ones.
Wood made sure to mention Tesla’s 121% year-over-year increase for Q2 deliveries. Keen to the imagery of the delivery report, Wood then elaborates on the significance of The Tesla Semi photo embedded in the page “just you wait,” she quips. While other autonomous vehicle companies such as TuSimple and Aurora may be getting attention, Wood believes Tesla’s autonomous tech is superior and will prove itself in time.
View Cathie Wood's full video here.
Disclosure: Rob Maurer and Brennan Ertl are long TSLA stock and derivatives.