Amid the implosion of crypto- and tech-oriented banks and expectations that the Federal Reserve may have to be more aggressive with interest rate hikes, tech stocks languished last week, with those with the disruptive and innovative labels incurring their share of punishment.
To be sure, those factors cannot be ignored, but the long-term outlook for assets such as the ARK Innovation Fund (ARKK) need not be so grim. In fact, a case can be made that ARK Investment Management’s flagship exchange traded fund could be a round candidate as 2023 moves forward.
One reason for that is expectations that tech sector mergers and acquisitions will perk up. It’s not an unreasonable assertion given depressed valuations among some smaller and mid-sized tech companies and the massive cash hoards held by their large-cap rivals.
“We expect to see increased M&A activity in the technology sector. Software clearly will consolidate this year, in our view, with much moving into private equity where there is some $1 trillion in cash waiting to be deployed,” observed BlackRock. “Software companies broadly derated to 5x revenue last year. We are already seeing private equity deals priced at 8x multiples. Such healthy premiums are likely to fuel a takeout wave. After a very bad year for software, we expect either public investors will recognize the value or private equity will.”
Another point in favor of ARKK is its exposure to artificial intelligence (AI). While companies with AI inroads aren’t entirely insulated from macroeconomic headwinds, there’s no denying that AI’s credibility is growing and taking the investment community by storm. In fact, some experts argue that generative AI is the most attractive tech-related investment opportunity since the dawn of the modern day internet three decades ago.
“The use-cases across businesses are endless, in our estimation, with potential to be extraordinarily disinflationary and change the long-run outlook for human labor. Initial investment opportunities are in the semiconductors that can support the computational needs of this ground-breaking technology. We see generative AI as the most revolutionary tech since the internet, with investment opportunities available now,” added BlackRock.
Specific to ARKK, the ETF’s largest component is Tesla (NASDAQ: TSLA) at an allocation of 9.90, as of March 10. Plenty of catalysts are on the table for the electric vehicle giant.
“In our view, Tesla is likely to deliver on interdependent actions that should reduce vehicle costs by ~50% during the next five years. First, it will produce 100% of the controllers on its next generation vehicle. Second, it will switch to a 48-volt battery architecture that should reduce power losses by 16-fold. Third, it will use local ethernet-connected controllers to reduce the complexity of the wiring harness. These electrical architecture changes should cut costs and give Tesla more control over its supply chain at the component level,” noted ARK analyst Tasha Keeney.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.