Cathie Wood Is Buying Archer Aviation Stock. Here's What History Says About Following Ark Into a Stock Down 62%.

Archer Aviation (NYSE: ACHR) stock has had a challenging run over the last year. The electric vertical take-off and landing (eVTOL) aircraft developer's share price is down roughly 62% over the stretch, and it now trades down almost 69% off its lifetime high.

While the market has turned sour on Archer recently, Ark Invest CEO Cathie Wood has been treating the big valuation pullbacks as buying opportunities. What does Wood's track record say about Archer's viability as an investment candidate right now?

Image source: Archer Aviation.

Cathie Wood has a checkered track record when it comes to beaten-down stocks

Big share price pullbacks can present great buying opportunities in some cases, but it's also true that stocks getting hit with huge sell-offs are often seeing valuation contractions for good reasons. Ark Invest's exchange-traded funds (ETFs) are primarily built around companies aiming to innovate and capitalize on significant growth potential in emerging categories, but there's a high level of risk that comes with backing businesses aiming to be technological forerunners and industry disruptors.

Over the last five years, Cathie Wood's flagship Ark Innovation ETF (NYSEMKT: ARKK) has seen its share price decline by roughly 30%. Over the same period, the S&P 500 index has recorded a total return of roughly 80%.

The high-risk, high-reward nature of the Ark Innovation ETF's portfolio composition opens the door to significant losses during periods of unfavorable market conditions or when key holdings deliver weaker-than-expected business performance. Crucially, Ark stock hasn't posted a 30% valuation slide in a period when the broader market was struggling. It has posted that performance during a period that has generally been favorable for growth stocks -- with innovative artificial intelligence (AI) players recording particularly strong gains across the stretch.

The dramatic underperformance for the Ark Innovation ETF over the last five years stems in part from the investment firm's decisions to buy more of stocks that were seeing big pullbacks in 2021 and 2022. Risky growth stocks saw huge valuation gains early this decade amid low interest rates and a surge in investor activity connected to pandemic stimulus, but many of these stocks saw dramatic sell-offs once the Federal Reserve pivoted to rate hikes in order to combat surging inflation.

• At one point, Ark was Teladoc's (NYSE: TDOC) largest shareholder. Wood's investment firm bet big on the telehealth specialist and continued to purchase shares even after the company's valuation collapsed following a massive write-down related to its acquisition of Livongo Health. Ark eventually completely exited its Teladoc position. Teladoc stock is down 95% over the last five years.
• Zoom Video Communications (NASDAQ: ZM) is another stock that was a pandemic-era darling and another stock that Ark continued to buy on the heels of big pullbacks. While Zoom was once the single largest portfolio position in the Ark Innovation ETF, the fund no longer holds the stock. Shares are down 65% over the last five years.
• Ginkgo Bioworks (NYSE: DNA) is another stock that Ark bought into weakness that wound up being a near-complete wipeout for the company. The biotech space is notoriously boom-or-bust, and Ginkgo's treatment pipeline never panned out. Ark has completely exited its position in Ginkgo, and the stock is down roughly 98% over the last five years.

Ark's high-risk, high-reward approach to fund composition invites significant volatility, and performance of its Innovation ETF over the last five years highlights the dangers of this type of strategy. Doubling down on losers that were seeing big sell-offs played a big role in the fund's weak results.

What does Ark's track record mean for Archer Aviation?

While Cathie Wood's Ark Innovation ETF has struggled over the last five years and had a spotty track record when it comes to picking beaten-down stocks with strong comeback potential, investors shouldn't treat that as a meaningful indicator for what's on the horizon for Archer Aviation stock.

Past performance does not dictate future results, and there's nothing about Ark's investments in other companies that can be reasonably taken as informative when it comes to estimating what comes next for Archer. The company's stock performance will continue to be shaped by developments for its business and the broader macroeconomic backdrop.

Right now, the core catalysts for Archer stock are developments related to the progress of testing and certification of its Midnight eVTOL aircraft, as well as eventual contributions from three subsidiary aviation businesses the company is acquiring from Boeing. These will likely continue to be the key catalysts in shaping longer-term performance, and investors shouldn't read too much into the performance of Ark's funds when it comes to the Archer's outlook.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Boeing, Teladoc Health, and Zoom Communications. The Motley Fool has a disclosure policy.