Back in March, I detailed how Ark Invest was doing some strange things behind the scenes in its flagship Ark Innovation ETF (ARKK). Cathie Wood and her team were changing some of their positions in an abnormal way, finding a way to lower their exposure to a select group of stocks. This month, the process has continued, and one particular name has stood out. Despite some pretty positive comments recently about Teladoc (NYSE:TDOC), Ark's actions have been quite a bit different.
The tele-health provider was one of the biggest beneficiaries of the pandemic, as in-person doctor visits became tricky in an effort to stop the spread. The company's subscriber base and revenues soared, leading shares to more than triple to over $300 at their peak. In addition to the flagship fund, Ark Invest also bought Teladoc in the Ark Next Generation Internet ETF (ARKW), Ark Genomic Revolution ETF (ARKG), and Ark Fintech Revolution ETF (ARKF).
With Cathie Wood's firm seeing massive inflows in 2020, the firm bought millions of shares of Teladoc across these funds. Like many of her other favorites, the portfolio manager continued to pile into names like Teladoc even as they plunged from their highs. In October 2021, Ark Invest passed the 10% ownership level of the entire Teladoc company, and that percentage has only increased further since.
Teladoc shares plunged again in late April after the company lowered its revenue guidance for the year. Despite holding shares at a massive loss, Ark Invest bought more, with Cathie Wood appearing on CNBC to detail her continued confidence in the company. She compared the company to Amazon (AMZN), while stating that their model had Teladoc going to new highs in the coming years. That would be a nearly 10X return from the price then, which is basically where we are now as well.
I mentioned in my previous article the "secret selling" of seven names in the ARKK ETF. Others would call it underweighting of the inflow or redemption basket. For example, if ARKK had net inflows equal to say 1% of its assets, it would report the next day that it had increased holdings in each of its components by 1%, except for these other names that perhaps only got say a 0.7% increase. On any one day, these changes might not look like much, but they really start to add up over time. The graphic below shows how this took place back in March, for example.
Now I'm focusing on Teladoc here today for a couple of reasons. First, it was the largest holding of the seven names above, so it had the biggest impact in terms of dollar value. The second reason is that Teladoc also was underweighted a little in the ARKG ETF for a few days here and there, so this wasn't an isolated incident. Finally, another round of this secret selling or underweighting has started recently in ARKK, and Teladoc is one of the four names being in focus yet again. The other repeat from the March process is Invitae (NVTA), but this smaller company has a much lower weight in the ETF and thus the dollar value impact is a lot less.
Back in late March and early April, this process took away a little more than 808,000 shares of Teladoc out from what should have been reported. The actual number may be a little less if you assume that normal weighting would have spread out more dollars over all components. However, that's a different argument because you don't know how exactly the process would have been had one or more of these seven names had equal inflows or redemptions with the rest of the ETF.
In the last couple of weeks, Cathie Wood has underweighted Teladoc so that another nearly 520,000 shares have been taken away as of last Thursday. This means that between these two multi-week events, roughly 1.33 million shares of Teladoc have essentially been pulled out, equivalent to about 10.7% of the total holding in that name at the start of the March process. Using the closing prices from the respective days involved, that turns out to equal roughly $75.5 million worth of Teladoc stock, a good portion of the $182.2 million total underweighted in these nine stocks over the past few months. In the graphic below, you can see the daily changes in a number of ARKK components over this time, along with how that has translated to the extra shares held back.
As for my personal opinion, I think Teladoc is a good company that like many pandemic names, just ran too much too fast. The tele-health space serves a part of the market that is definitely needed, as there are times where people just cannot get to a doctor's office. Currently, analysts see about 20% revenue growth per year moving forward, but the name has been hit because that top line number came down very quickly after its major pandemic boost.
In the market today, investors have migrated away from non-profitable techs, and Teladoc did report net losses of over $900 million between 2020 and 2021. While the bulls may point out that the company was free cash flow positive last year, this is really due to significant stock based compensation, so investors are being diluted a bit over time. Financially, the company is in much better shape than a lot of other heavy cash burn Cathie Wood favorites.
At the moment, the average price target on Teladoc is $52.80. While that implies decent upside, the average has also come down more than $200 from its high. It's hard to give the name a fair value currently because a further market pullback on higher interest rates will likely hit this name before many others. However, I do see a potential floor in the stock, because if it falls too much, I think this is the kind of name that could be a potential takeover target for a large health name trying to expand its offerings. Ironically, I also think Amazon could be a potential acquirer at the right price, as the tech giant is looking to expand its health business and does have a partnership already with Teladoc.
Cathie Wood has recently called Teladoc the next Amazon and has argued that shares could set new all-time highs in the coming years. Despite calling for potential 10X returns, her ETFs have actually been selling shares behind the scenes or underweighting them on inflows and redemptions, whichever term you prefer. As a result, the tele-health name has more than a million shares less held by Ark Invest than it should have, which seemingly is a major lack of conviction, and this unusual process has happened in more than just the flagship ARKK fund during this time.
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