Cathie Wood and her analysts discuss why Tesla's $1.5 billion bitcoin purchase could trigger a wave of corporate investments, the fallout of the GameStop-AMC phenomenon, and their bullish views on the Chinese stock behind Clubhouse

  • In a Tuesday webinar, Ark CEO Cathie Wood said stocks are not in a bubble but bonds are.
  • She and her team break down the implications of Tesla’s $1.5 billion bitcoin investment.
  • They also shared the investment case for the Chinese stock behind the audio chat app Clubhouse. 
  • Visit the Business section of Insider for more stories.

Many investors point to the rise and fall of GameStop as a sign of the speculative bubble in the stock market. But Ark Invest’s Cathie Wood says the bubble is in the bond market, which Reddit traders helped inflate further. 

“We do not think stocks as a whole are in a bubble,” said Wood, CEO and founder of the $50 billion Ark Invest, in a Tuesday market update webinar.

If there is a bubble, it is in the bond market, Wood said, adding that private equity has continued to feed this bubble by saddling mature companies with debt so that the industry can continue to receive distributions. 

“What they’re doing is they’re sustaining very high cash flow multiples again by not investing in the future,” she said. “And that becomes problematic for these companies and their high cash flow margins will disappear over time.”

What has further inflated the bond bubble is Reddit traders’ short squeeze and gamma squeeze on companies such as GameStop and AMC, according to Wood.

She used the example of AMC, whose most-heavily traded bonds were selling five cents on the dollar back in October. The same bonds have since moved up to 80 cents on the dollar after Reddit traders drove up the stock price of AMC, which took advantage of its soaring price by launching a $50 million stock offering and other debt deals. 

“Equity holders are bailing bondholders out of their mistakes,” she said, “or if companies have been opportunistic and picking up bonds for five cents on the dollar, they’ve hit a Grand Slam in the context of the bond market.”

But AMC was on the brink of bankruptcy and its fresh round of financing during the meme stock trading frenzy alone is unlikely to resurrect the pandemic-ravaged movie theater business, Wood said. 

“Who will be left holding the bag if AMC goes bankrupt,” she added. “We think that this phenomenon has actually increased the bond bubble out there and we’re kind of astonished by it actually.”

Tesla’s $1.5 billion bitcoin investment 

Amid the GameStop drama, Wood said her team has continued to focus on the five innovation platforms and 14 different technologies that underpin Ark’s five actively managed funds and two index-tracking ETFs. 

But on Monday, two of Ark’s biggest bets — Tesla and bitcoin — crossed paths. In an annual 10-K filing, Tesla said it had purchased $1.5 billion worth of bitcoin in January for its treasury reserves and that it expected to accept the cryptocurrency as a form of payment for its products “in the near future.”

Bitcoin soared to a record high of $47,000 per coin on the news, which also pushed the combined market cap of bitcoin and ethereum above $1 trillion for the first time, according to Ark’s crypto analyst Yassine Elmandjra.

“This news really seems to have marked both a cultural and institutional tipping point for Bitcoin,” he said.

While MicroStrategy and Square’s balance sheet investment in bitcoin paved the way for the cryptocurrency to become corporate cash, Tesla’s decision could very well be the beginning of a new wave of corporations that are looking to diversify their cash positions, he added. 

According to Ark’s research, a 1% allocation by S&P 500 companies into bitcoin as corporate cash would have a $40,000 impact on price, while a 10% allocation will have a $400,000 impact. The opportunity size is illustrated in the chart below.

To put it in context, Square has about a 2% allocation to bitcoin relative to cash, Tesla has closer to 10%, and  MicroStrategy has more than 100% due to the firm’s recent debt offering that it launched just to purchase Bitcoin.

Elmandjra adds that bitcoin’s corporate balance sheet opportunity could also drive other opportunities such as its role as an investment for major institutional investors and asset managers, which would have a $200,000 to $500,000 impact on price. 

“So we expect this trend to continue and now with Bitcoin today nearing $50,000, this means that there still is room potentially to run,” he said. “It could continue to scale by an order of magnitude, according to our research, and ultimately reach between a $5 trillion and $10 trillion market cap.”

Ark analyst Tasha Keeney offered a glimpse of how Tesla might accept bitcoin as a form of payment for its products in the future. Keeney, who has researched how Tesla could launch a profitable ride-hailing fleet across the world, said it would be more efficient for the EV maker to accept bitcoin as opposed to taking direct foreign currencies as payments in that scenario. 

The Chinese stock powering Clubhouse 

Another top Ark holding that recently stepped into the spotlight is Chinese audio technology company Agora (API), which accounts for about 2.69% of the $27 billion Ark Innovation ETF (ARKW). 

Shanghai-based Agora, whose stock has shot up 125% over the past three months, provides real-time communication for up to millions of users per single instance, which a technically challenging task that many decent-sized companies cannot afford to do in-house, according to Ark analyst Yulong Cui. 

Cui explained that the recent surge of the stock can be attributed to two main drivers, one being the resurfacing of COVID-19 and its variant in Northern China in mid-January, which led schools and workplaces to shut down. 

The other driver is tied to the rise of the invite-only audio chat app Clubhouse. The viral app, which relies on Agora for back-end, real-time communication services, is valued at $1 billion and has 6 million registered users.

“If you do the simple math of taking the list price of 99 cents per 1000 minutes, which is the list price that Agora charges its customers, and map out this growth trajectory for Clubhouse,” Cui said, “it’s not very difficult to get to a very sizeable revenue growth on a run-rate basis for this year, which is not currently baked into the consensus numbers.”

While Agora has risen in tandem with Clubhouse so far, Cui said there is the possibility of Clubhouse choosing to multi-source or asking for a volume discount as it grows bigger. But overall, he is optimistic about the long-term prospect of the company. 

“We think Agora is a very interesting way — a platform-agnostic way — to play this virtualization scene that we have in terms of metaverse, in terms of more activities done virtually,” he said.

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