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Cathie Wood’s Worst Nightmare Comes True

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In 2020, the world went into lockdown.

Health officials declared Covid-19 a global pandemic and planes stopped flying, bars, gyms and theaters closed, and people retreated to their homes to wait out the disease that had thoroughly disrupted their lives.

Pandemic Stock Surge

Many businesses closed, but some–the so called “pandemic stocks”– saw their shares surge as isolation became a way of life.

Companies like Teladoc Health  (TDOC) – Get Teladoc Health, Inc. Report, Zoom Video Communications  (ZM) – Get Zoom Video Communications, Inc. Class A Report, Netflix  (NFLX) – Get Netflix, Inc. Report and Peloton Interactive  (PTON) – Get Peloton Interactive, Inc. Class A Report made the most out of social distancing.

But the Covid-19 pandemic didn’t last forever–even though it felt like it might.

Vaccines were developed, the world is reopening and now many of the pandemic stocks are watching their profits floating away on a river of red ink.

“Stay at home is the Dotcom Boom of today,” one observed tweeted recently. “Lots of failures but some gigantic winners will emerge.”

Peloton, saw its shares drop 48.35% from Dec.31’s figure of $35.76 a share to $18.47 on April 28.

Netflix posted the first decline in annual subscriber growth in more than a decade earlier this month. Shares fell about 67% since Dec.31 to $199.52 on April 28.

Cathie Wood’s flagship Ark Investment Management  (ARKK) – Get ARK Innovation ETF Report is Teladoc’s top institutional holder, owning 12.1% of the virtual healthcare services company’s shares as of March 30.

Is There A Doctor in the House?

Teladoc, which is Ark’s third-largest holding, cratered after it posted a first-quarter net loss of $6.7 billion, or a loss of $41.58 a share and slashed its guidance.

The net loss included a non-cash goodwill impairment charge of $6.6 billion, or a loss of $41.1 a share.

Teladoc slashed its 2022 full-year revenue between $2.4 billion to $2.5 billion, compared with an earlier forecast of $2.55 billion to $2.65 billion.

The company was also contending with problems stemming from its direct-to-consumer mental health service, BetterHelp.

“Over the past several weeks, we’ve seen lower-than-expected yield on marketing spend for BetterHelp, which is a reversal of the trends we experienced exiting 2021 and in the early part of 2022,” said CEO Jason Gorevic, according to a transcript of the earnings call.

Gorevic cited paid search advertising, “where we’ve seen a notable increase in rates for keywords associated with online therapy.”

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“We believe the biggest driver of this dynamic is smaller private competitors pursuing what we think are low or no return customer acquisition strategies in an attempt to establish market share,” he said.

Gorevic also said the company was “seeing our chronic care sales pipeline develop more slowly than anticipated.”

“It’s still somewhat early in the selling season but based on how the pipeline has developed over the first four months of the year, we felt it was prudent to update our forecast,” he said.

The company’s shares lost about 42.5% of their value in less than a week, dropping to $33.51 a share on April 28 from $58.25 a share on April 22.

Teladoc shares lost 63.5% of their value since Dec. 31, when they were going for $91.82 and its market capitalization dropped by about $4 billion to $5.4 billion on April 28.

‘You’ve Done Nothing But Cost Me Money.’

The losses did not slow down Wood, who on April 28, bought 609,665 shares of the battered company. During an interview with CNBC, Wood said Teladoc will be a “category killer” over the next five to 10 years.

Zoom is the second-largest holding in the Ark Innovation EFT and its share value has dropped by about 44.2% from the Dec.31 closing price of $183.91. 

So has Cathie Woods lost her edge or is she just going through a slump? 

“I can’t believe I bought $ARKK at the top. You’ve done nothing bust cost me money,” one person tweeted to Woods.

“Are u going to sell all $TDOC at a huge loss given its poor earning report and admitted you have been wrong?” another person asked.

One irate poster tweeted a video clip of a fire-worshipping Muppet and stated that “in this week’s newsletter, ARK investors find out they are baggies and will lose all their money under the guidance of the AuntieChrist.”

‘Take Your Lumps’

Hedge fund manager Doug Kass wrote in a recent Real Money column that Wood “has crashed spectacularly due to a combination of hubris and very poor stock selection.”

“Woods tries to make the case for innovation,” Kass wrote. “Unfortunately, the evidence is that she is willing to pay any price for that innovation as were it not for ARK’s large investment in Tesla the fund’s returns would have been even more horrific.”

Gita Rao, senior lecturer in finance at the MIT Sloan School of Management, however, said Wood is “a very experienced manager.”

“She’s not managing a defensive growth fund,” she said. “She’s managing a high-octane growth fund.”

Rao noted that growth stocks are feeling the impact of such factors as spiraling inflation, Russia’s invasion of Ukraine and the continued impact of the Covid-19 pandemic.

“Even under normal circumstances inflation and an increase in interest rates are both bad for growth stocks,” she said. “We haven’t had this cycle in a very long time.”

The current situation, she said, is “a classic late-cycle rotation out of growth into value.”

Rao added that “we mustn’t forget that these stocks are very richly valued, so people were very comfortable with them on the way up, and now they are probably coming close to fair valuation, but analysts are not cutting their estimates enough.”

“It’s all about valuation and right now people are saying we have to reconsider the value of these stocks,” she said.

Woods, Rao said, is “managing to a certain style and you’ve got to take your lumps.” 

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