Palantir’s [PLTR] share price closed 10 May down 21.6% in the year to date. The stock reached an intraday high of $45 in late January and traded in the high $30s in February, before a tech industry-wide slowdown saw Palantir’s share price crash to $19.75 by the end of the first week of May.
Despite this slump, Palantir’s share price is still 84.7% above its IPO price from September 2020.
Similarly, Skillz’s [SKLZ] share price closed 10 May down 27.9% for the year-to-date, despite a surge in late April.
The esports platform enjoyed a strong start to the year, reaching a high of $46.30 in early February. The slowdown saw Skillz’s share price plummet to $12.55 by 20 April. Skillz’s share price is now 19.5% below its level on 17 December 2020, when it went public via a SPAC.
Steering the ARKK
A supporter of both of these stocks, Ark Invest’s flagship ARK Innovation ETF [ARKK] has struggled over recent months, falling 34.9% since hitting an all-time high of $159.70 in February (through 10 May’s close).
The opening days of May have been a particularly problematic. The fund’s value fell 13.9% between 30 April and 10 May, when it closed at $103.98.
However, Cathie Wood, founder and CIO of Ark Invest, appeared unfazed by the slump during an interview with CNBC’s Closing Bell. She explained that the worst scenario for her strategy was an extended market focus on her company’s “ilk of stock — the innovation space.”
“From our point of view — [a] five-year time horizon — nothing has changed except the price,” she said. She said that the fall in her fund’s favoured stocks since the February peaks means her expected 15% compound annual rate of return has now risen to 25-30%.
"Nothing has changed except the price" - Cathie Wood, Ark Invest
Amid market rotation from growth to value stocks, Wood’s funds have begun selling off their cash-like assets, such as Apple [AAPL], in favour of “our more pure-play or earlier-stage innovation companies that are being hurt by risk-off.” Among these are Palantir and Skillz, both of which listed in the second half of 2020 and have seen their share prices slump in the recent tech slowdown.
In early May, Ark Invest purchased over 1.5 million shares in Palantir and 3 million in Skillz, allocating all the Palantir shares to the ARK Innovation ETF and dividing Skillz’s between the flagship fund and the ARK Next Generation Internet ETF [ARKW] with a 2.7 million to 354,000 split.
The purchases make Palantir (Alex Carp, Palantir’s CEO, is pictured above) the 17th-largest holding in the ARK Innovation Fund, with 1.63% of the fund’s weight as of 11 May, while Skillz is now the 36th-largest holding with 1.02% of the fund’s value and the 18th-largest holding in ARK Next Generation Internet ETF, comprising 2.09% of the fund.
Palantir’s fourth-quarter 2020 revenue showed a year-over-year 40% increase to $322m, bringing total revenues for the full year to $1.1bn. This is still only thought to be a fraction of the data analytics firm’s potential market, and current expectations see Palantir’s revenue more than quadrupling over the next four years to $4bn in 2024.
Palantir’s existing business appears fundamentally stable thanks to its government contracts and high switching costs, which isn’t true for large chunks of the innovative technology sector.
The size of the addressable market for internal governmental contracts in the US alone is thought to be as high as $37bn, giving Palantir a solid foundation in a space with ample room for growth.
Palantir's US internal governmental addressable market
On the other hand, two short reports have hampered Skillz’s share price in recent months. However, Wood herself has stepped in to defend the company from the claims. Skillz reported strong Q1 results on 4 May, including sales of $83.7m, and saw its share price gain circa 2.5% on the day as a result.
Like Palantir, Skillz has a firm foothold in a high-growth market. The mobile gaming industry is currently worth $86bn annually, and Skillz is the first mover towards what some believe to be the future of the market: tournament-based revenue models, as opposed to ad-supported and in-game purchase models.
The recent tech pullback has hurt “high-quality, hypergrowth stocks” with abundant long-term potential, said Luke Lango, a senior investment analyst writing for InvestorPlace. He believed that “now is the time to buy these stocks”.
Investors have fled some of Ark Invest’s key funds recently, with approximately $760m of assets alone withdrawn in the week ending 7 May, reported CNBC, citing data from FactSet.
This is likely to be a reflection of the reputation Wood and her funds have gained for quick wins off the back of ballooning tech assets over the last year.
However, Wood says that Ark Invest’s strategy follows a longer-sighted view. In this context, the recent tech slowdown is all part of the plan, providing a buying opportunity for temporarily cheaper, high-growth stocks.