Cathie Wood, the founder and CEO of Ark Invest, rose to popularity during the coronavirus pandemic thanks to her firm’s successful bets on some of the most disruptive tech companies. Her flagship exchange-traded fund (ETF), the Ark Innovation ETF (ARKK 5.54%), skyrocketed 153% in 2021, prompting many investors to closely watch her trading moves as signals for what they should do with their own portfolios.
But then, the rapid pandemic-fueled growth a lot of Wood’s holdings had been benefiting from dissipated, and their stock prices plummeted. The tech-heavy Nasdaq Composite Index entered a bear market in 2022, and ended it down 33% for the year. One lesson investors can learn from last year’s market is that even the most innovative businesses can see their shares crash.
However, this reality hasn’t stopped Wood from remaining optimistic about innovators. Here are three beaten-down growth stocks that Wood is still bullish on.
Streaming video platform leader Roku (ROKU 6.58%) has been dealing with some major issues lately, and its shares cratered 82% in 2022. Inflationary pressures have resulted in higher manufacturing costs for its hardware products, and management has decided not to pass those higher prices on to customers, leading to a negative hardware gross margin over the last six quarters.
Additionally, the weaker ad market is hurting Roku’s prospects. When the Federal Reserve aggressively hiked benchmark interest rates last year to fight soaring inflation, many executives started preparing for a recession. And when a negative macroeconomic outlook takes hold, advertising budgets are among the first things that companies cut. Through the first nine months of 2022, Roku increased its revenue by 19% year over year. For the just-ended fourth quarter, management is expecting to report a 7.5% drop.
But it’s not hard to see why Wood likes Roku so much. It provides a valuable service to viewers who want to be able to easily access all of their streaming services in one place, content companies that want to reach a wide audience, and advertisers looking to market in this connected-TV environment. Roku’s active accounts grew by 16.5% year over year in Q3 2022 to 70 million, as consumers streamed a whopping 23.9 billion hours of content on its platform in that quarter alone.
As of Dec. 31, Roku was the fourth-largest holding of the Ark Innovation ETF.
Shares of fintech pioneer Block (SQ 3.25%), formerly known as Square, fell by 61% in 2022, and now trade at a price-to-sales multiple of 2.6, near the cheapest they’ve ever been by that metric.
That poor stock performance might not be warranted given that the digital payments innovator increased gross profit in both of its segments, Square and Cash App, by 29% and 51%, respectively, in the third quarter — its most recently reported period — on a year-over-year basis. That’s respectable growth in this type of economic environment.
Its Square segment, which processed $50 billion in gross payment volume in Q3, is a mission-critical service provider for its customers. Small merchants depend on Square as the backbone of their day-to-day operations. Without it, they run the risk of losing sales and customers.
Cash App, on the other hand, is a burgeoning mobile finance app that has amassed 49 million monthly active users. It provides a seamless user experience, letting account holders handle basic financial services like signing up for a debit card or buying stocks, all without dealing with the hassles of a traditional bank.
With a total addressable market of $120 billion in 2022 gross profits — and expanding every year — there is almost limitless potential for both Square and Cash App to ride the secular trend of electronic payments.
Block is currently the fifth-largest holding of the Ark Innovation ETF.
Since its initial public offering in April 2021, Coinbase Global (COIN 15.75%) has seen its stock plummet by 84%. The blame can be put on external factors, namely the ongoing “crypto winter,” as well as recent high-profile bankruptcies and scandals in the cryptocurrency industry that have depleted people’s trust in crypto.
Because Coinbase generates most of its revenue — 63% in Q3 — from transaction fees, the business is heavily influenced by the level of investor interest in digital assets. When crypto prices are generally on the rise, Coinbase has no problem attracting more users who trade frequently. When crypto prices crash, as they did in 2022, the company posts net losses and has to lay off employees.
However, the hope is that Coinbase can help usher in the next phase for cryptocurrencies, in which they move away from being primarily assets for financial speculation and instead become dominated by utility. That shift could be several years down the road, but if decentralized applications and non-fungible tokens take off and become common parts of people’s financial lives, it’s difficult to imagine a world in which Coinbase doesn’t serve as a primary gateway app for many to access the crypto economy. And in that scenario, the stock’s upside is absolutely massive.
As of Dec. 31, Coinbase was the eighth-biggest holding of the Ark Innovation ETF.