10% of Cathie Wood’s Portfolio Is Invested in Elon Musk-Led Companies

Cathie Wood is big on innovation. The CEO of Ark Invest believes disruptive technologies will drive significant productivity gains over the long run, and the companies at the forefront of that will deliver superior stock market returns. It's no wonder, then, that Wood has a stake in both publicly traded corporations led by Elon Musk: Space Exploration Technologies (NASDAQ:SPCX) and Tesla (NASDAQ:TSLA). Musk is also a believer in the power of innovation, and he has an impressive track record. SpaceX and Tesla account for about 10% of Ark Invest’s total holdings (as of writing). That's not insignificant. But is that a good move?

Image source: Getty Images.

Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »

Betting on Musk has its perks

Musk has accomplished phenomenal things as the CEO of Tesla and SpaceX. Consider his tenure at the head of the electric vehicle (EV) maker. When Tesla first got onto the scene, EVs already existed, but they were not exactly popular. Some thought they couldn't compete with gas-powered cars in terms of raw performance. Others thought they would never catch on because of a lack of charging infrastructure.

These were just two of the problems Tesla faced. But it overcame them. Tesla launched several models, including the Model Y, which has been the world's most popular car -- EV or not -- for the past three years. There are other ways in which Tesla revolutionized the automobile industry, notably through its vertically integrated approach and direct-to-consumer sales model. The results have been phenomenal. Tesla has crushed broader equities since its 2010 IPO.

What about SpaceX? We don't yet know whether it will generate Tesla-like returns over the long run, but there is no question that it has also been at the forefront of innovation. SpaceX revolutionized space travel by pioneering reusable rockets, which have helped significantly decrease costs in the industry. SpaceX dominates this market. The rocket company also provides satellite-based internet services, particularly in underserved areas. SpaceX may just be getting started, and future breakthroughs could enable it to beat the market.

Consider this before investing

SpaceX has been on the market for about two and a half months. It debuted at $150, some 11% above its IPO price. Then the stock soared to as much as $225.64 before dropping sharply and bottoming out at $104.63. Now, it's back around its $135 IPO price. Why so much volatility? There are several reasons, but let's focus on one. Musk's track record is impressive enough that some investors were willing to pay a premium to get in on what they perceived as the ground floor -- early in the company's tenure on public equity markets.

But eventually, reality caught on. SpaceX is a great company, no doubt, but its valuation looks a little frothy, to say the least. The company's price-to-sales ratio of 63.7 appears incredibly high and already reflects optimistic expectations. Any sign of a setback can send the stock price down meaningfully. That's a large part of SpaceX's story since it went public in June, and the stock will likely remain volatile.

What will it take for SpaceX to beat the market? Consistently exceeding expectations. Note that in the second quarter, SpaceX grew its revenue by 92% year over year to $7.8 billion, while cutting its net loss almost in half, from $1 billion to $541 million. Those results beat estimates, but the stock fell following its Q2 update. Why? Again, partly because of valuation. Shares subsequently rose for other reasons.

Here's the lesson: SpaceX isn't for the faint of heart. Whichever way the stock moves in the long run, it will take investors on a wild roller-coaster ride. We could say the same about Tesla. The stock is currently trading at 178.6x forward earnings, with the success of its robotaxi project already significantly priced into the share price. This could be a transformational initiative for Tesla, but it's not guaranteed to succeed yet.

What's more, Tesla faces significant competition in the robotaxi industry. So, the stock will also be volatile. What does all of this mean for investors? It's probably not a good idea to have 10% of your portfolio invested in SpaceX and Tesla, not unless you are comfortable with heightened risk and volatility. Sure, the upside potential is massive, but so is the downside risk, and there is little room for error for those who get in at current levels. Keep that in mind before initiating a position -- even a small one -- in either of these Musk-led corporations.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.