Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
You can access both of our platforms from a single Saxo account.
The Tesla-Bitcoin-Ark syndrome revisited
Peter Garnry
Chief Investment Strategist
Summary: Tesla CEO Elon Musk has dramatically increased the risk of Tesla with the company's $1.5bn holding of Bitcoin as the underlying volatility has greatly increased expected volatility in net income to shareholders of Tesla. The investment firm Ark Invest has long been a strong proponent of Tesla with its shares being the most dominate position across all Ark Invest funds and with its recent success clearly moving prices in biotechnology stocks we are yet again exploring the risk cluster of Tesla shares, Bitcoin, and Ark Invest holdings, as something investors should be aware of before the next correction in equities hit.
Tesla announced yesterday that it had accumulated a $1.5bn position in Bitcoin and was contemplating to accept Bitcoin as payment for its cars. This follows weeks of Tesla CEO Elon Musk talking positively of cryptocurrencies on Twitter. The cryptocurrency market was not late in celebrating the move and Bitcoin is up 20% in just two trading sessions. In our view, the move by Tesla is both risky and obfuscating the valuation of the company. With the volatility in Bitcoin, Tesla could easily experience a 50% loss on their $1.5bn investment adding a $750mn mark-to-market loss which would be almost the entire FY20 adjusted net income of $812mn. In other words, Elon Musk has exposed Tesla to immense mark-to-market risk. This means that the equity valuation models will become extremely sensitive to fluctuations in the value of Bitcoin.
It would have been much less risky for Tesla to support Bitcoin by announcing that it was working towards receiving payments in Bitcoin. But even that will prove risky due to volatility exposing Tesla payments to a huge risk. Secondly, Bitcoin still has an issue with money laundering and know-your-customer policies making it very cumbersome for Tesla to accept payment in Bitcoin without aggressively ramping up compliance teams and processes.
On a more positive note for the actual driver of Tesla, the 10-K filing announcing the Bitcoin holding, the company also announced FY20 revenue breakdown on geographies showing that for the first time ever, more than 50% of revenue came from outside the US.
Ark Invest is building a tower of risk
Before the news broke on Tesla and Bitcoin, we were planning a research note on Ark Invest holdings across their five actively managed ETFs. Our motivation was driven by the fact that Ark Invest recently pushed above $50bn in asset under management (AUM) and that some holdings in the Ark Disruptive Innovation ETF were getting quite concentrated. As a result, we have dived into the numbers and can now extend our note It is time to get cautious on the Tesla-Bitcoin-Ark connection back in January.
There are two main idiosyncratic risk sources around the Ark funds if we exclude the general market risk. The first one, is the percent ownership of outstanding shares in a specific company across holdings in its five actively managed ETFs. The list below shows the company where Ark Invest owns more than 10% of the outstanding. The sharp observer will quickly note a big overlap with the new generation of biotechnology companies, that we also recently wrote about, and given Ark Invest has grown AUM from around $3bn a year ago to over $50bn gives you an indication of how big a force the investment firm has been in the bull market in biotechnology stocks. But AUM flow can reverse and thus these concentrated positions can become a liquidity issue and big risk for these stocks and Ark Invest itself.
| Name | Ark position (USD mn.) | Market value (USD, mn.) | Ark position in % outstanding shares | % weight of AUM |
| Compugen Ltd | 202 | 1,141 | 17.7 | 0.4 |
| Invitae Corp | 1,165 | 7,225 | 16.1 | 2.2 |
| Cerus Corp | 203 | 1,315 | 15.5 | 0.4 |
| 2U Inc | 512 | 3,349 | 15.3 | 1 |
| Lightspeed Management Co LLC | 273 | 1,791 | 15.3 | 0.5 |
| Arcturus Therapeutics Holdings | 331 | 2,248 | 14.7 | 0.6 |
| Stratasys Ltd | 442 | 3,078 | 14.3 | 0.8 |
| Materialise NV | 568 | 4,003 | 14.2 | 1.1 |
| Cellectis SA | 158 | 1,200 | 13.2 | 0.3 |
| Pure Storage Inc | 989 | 7,532 | 13.1 | 1.9 |
| LendingTree Inc | 597 | 4,600 | 13 | 1.1 |
| Syros Pharmaceuticals Inc | 101 | 788 | 12.8 | 0.2 |
| Twist Bioscience Corp | 1,064 | 8,526 | 12.5 | 2 |
| Pacific Biosciences of Califor | 901 | 7,190 | 12.5 | 1.7 |
| Intellia Therapeutics Inc | 592 | 4,753 | 12.5 | 1.1 |
| Veracyte Inc | 627 | 5,042 | 12.4 | 1.2 |
| Precigen Inc | 82 | 657 | 12.4 | 0.2 |
| Proto Labs Inc | 724 | 6,067 | 11.9 | 1.4 |
| Iovance Biotherapeutics Inc | 911 | 7,714 | 11.8 | 1.7 |
| Seres Therapeutics Inc | 311 | 2,639 | 11.8 | 0.6 |
| Editas Medicine Inc | 538 | 4,617 | 11.6 | 1 |
| PagerDuty Inc | 535 | 4,596 | 11.6 | 1 |
| Organovo Holdings Inc | 15 | 131 | 11.6 | 0 |
| CRISPR Therapeutics AG | 1,402 | 12,509 | 11.2 | 2.7 |
| Evogene Ltd | 37 | 333 | 11 | 0.1 |
| Castle Biosciences Inc | 248 | 2,270 | 10.9 | 0.5 |
| Pluristem Therapeutics Inc | 26 | 244 | 10.5 | 0 |
| CareDx Inc | 482 | 4,759 | 10.1 | 0.9 |
Source: Saxo Group, and Ark Invest
The second risk source is from individual holdings of stocks in percentage of their AUM. The list below shows that Tesla shares across their funds are 6.7% of total AUM in those five funds. The three other large positions are Teladoc Health, Roku, and Square. What it means is, that a correction in equities for whatever reasons, could be higher interest rates or prolonged Covid-19 lockdowns, could set in motion sell-offs across either biotechnology stocks or Tesla shares and cause performance to deteriorate which could start net outflow of AUM and then the feedback loop has started. Our hypothesis is that there is a high degree of overlap between investors and speculators in Tesla shares, Bitcoin, and other cryptocurrencies, and then Ark Invest funds or related stocks such as the biotechnology stocks. This risk concentration is important to understand if you have positions in your portfolio that is part of this “network structure” of positions.
| Name | Ark position (USD mn.) | Market value (USD, mn.) | Ark position in % outstanding shares | % weight of AUM |
| Tesla Inc | 3,526 | 828,757 | 0.4 | 6.7 |
| Teladoc Health Inc | 2,695 | 42,697 | 6.3 | 5.1 |
| Roku Inc | 2,010 | 55,168 | 3.6 | 3.8 |
| Square Inc | 1,810 | 117,230 | 1.5 | 3.4 |
| CRISPR Therapeutics AG | 1,402 | 12,509 | 11.2 | 2.7 |
| Invitae Corp | 1,165 | 7,225 | 16.1 | 2.2 |
| Twist Bioscience Corp | 1,064 | 8,526 | 12.5 | 2 |
| Zillow Group Inc | 1,074 | 38,358 | 2.8 | 2 |
| Baidu Inc | 1,054 | 94,342 | 1.1 | 2 |
| Tencent Holdings Ltd | 1,064 | 912,439 | 0.1 | 2 |
| Pure Storage Inc | 989 | 7,532 | 13.1 | 1.9 |
| Exact Sciences Corp | 984 | 25,056 | 3.9 | 1.9 |
| Spotify Technology SA | 1,006 | 61,589 | 1.6 | 1.9 |
| Pacific Biosciences of Califor | 901 | 7,190 | 12.5 | 1.7 |
| Iovance Biotherapeutics Inc | 911 | 7,714 | 11.8 | 1.7 |
| Shopify Inc | 819 | 165,874 | 0.5 | 1.6 |
| PayPal Holdings Inc | 865 | 330,471 | 0.3 | 1.6 |
| Twilio Inc | 794 | 60,310 | 1.3 | 1.5 |
Source: Saxo Group, and Ark Invest
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