Cathie Wood made something of a name for herself in 2020. The founder and CEO of ARK Investment managed five flagship exchange-traded funds (ETFs) that crushed the returns of the broader market last year, with each returning more than 100%. The results aren't too surprising, given Wood's focus on disruptive and emerging technologies that got a boost during the pandemic.
Finding companies that are market leaders in their respective areas, boast significant secular tailwinds, and have large and growing addressable markets can deliver game-changing returns that could make you a fortune. Let's look at three companies that Wood was buying last week that fit the bill.
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Twilio: The leader in app- and software-based communication
One of the biggest takeaways from 2020 was the need for customers to be able to communicate with businesses quickly and easily without having to track down the right channel. That's where Twilio (TWLO -0.73%) comes in. Real-time text message? Check. In-app customer service chats? Check. One-click phone calls? Check.
While it's not a household name, many customers use the company's tools without ever knowing. The arrival estimates from Uber and Lyft? The real-time update that your table is ready now via Yelp? The online chat with your Dell customer service representative? If you've experienced any of those (or a multitude of others), there's a pretty good chance it was the result of Twilio's technology. The company provides the cloud-based building blocks that help businesses communicate with their customers, all without ever leaving the app.
The company gained a host of new converts last year. Revenue grew 55%, while adjusted profit climbed 57%. Robust customer acquisitions fueled its growth, as Twilio's total active customers rose 23% to 221,000. Not only is the company attracting new users, but its existing customers are spending more, as evidenced by its dollar-based net expansion rate, which grew to 139%.
Twilio has big ambitions, however, with the goal of becoming the leading customer engagement platform. It's making progress toward that objective, with the recent acquisitions of email communications specialist SendGrid and customer data platform Segment. These expanded the company's already sizable opportunity. Management is now forecasting that Twilio's total addressable market will grow to $87 billion by 2023. The company generated revenue of just $1.76 billion in 2020, which helps illustrate the magnitude of the opportunity ahead.
With all that going for the company, it isn't surprising that ARK Innovation (ARKK -1.44%) ETF and ARK Next Generation Internet (ARKW -1.12%) ETF both increased their positions in Twilio last week, now representing 2.45% and 2.3% of their holdings, respectively.
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Teladoc: The future of medicine
Another lesson gleaned over the past year has been the ease and utility offered by telemedicine. The ability to see your healthcare provider without ever leaving the comfort of your home has implications that will last far beyond the pandemic. As the leading provider of telehealth services, Teladoc Health (TDOC 0.08%) is at the forefront of the digital health revolution.
Bears will submit that once life returns to normal, the need for telemedicine will dwindle, but the evidence suggests otherwise. A survey of 2,700 patients reported that 90% of respondents said the quality of care during digital visits was as good, if not better than, physical office visits, while 60% said they planned to use telehealth solutions even more in the future.
Teladoc was already generating impressive growth, but the pandemic kicked its results into high gear. Revenue grew 98% year over year in 2020, with robust growth in patient visits that soared 206%. The company's net loss also jumped, affected by a combination of acquisition-related expenses and income tax complications. Backing out those one-time charges resulted in adjusted EBITDA that increased 298%.
The company also acquired Livongo Health, the leader in managing chronic conditions via connected devices. There are more than 147 million patients in the U.S. alone who have at least one chronic condition. Providing patients with strategies to help control these conditions is a rare win-win, improving quality of life while lowering the cost of healthcare for those dealing with diabetes, hypertension, weight management, diabetes prevention, and behavioral health.
Post-merger, Teladoc's addressable market is estimated at more than $64 billion. Given its full-year revenue of $1.09 billion, there's a long and lucrative road ahead.
Wood added to already sizable Teladoc holdings last week, with ARK Next Generation Internet, ARK Innovation, and ARK Genomic Revolution (ARKG -2.20%) ETFs all adding shares. This brought Teladoc to 4%, 6%, and 7% of their holdings, respectively, making it a Top 10 position in all three funds.
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Zillow: The leader in digital real estate
Zillow (Z -1.82%) (ZG -1.92%) was a pioneer in digital real estate long before the pandemic reared its ugly head, but there's no denying last year helped raise the company's profile. Many investors may still associate Zillow with its pioneering home value estimates website, which derived the majority of its revenue from real estate-related advertising.
In recent years, however, the company has evolved and now handles digitally enabled real estate transactions and adjacent services. Its technology and app-based services are well-positioned for the future evolution of home buying and selling. Zillow's inventory of homes for sale slumped during the height of the pandemic but has rebounded remarkably in recent months.
Despite the negative effect of the pandemic, Zillow grew revenue by 22%, but that doesn't tell the entire story. The company's core internet, media, and technology (IMT) segment -- which still generates the majority of its revenue -- was hardest hit, growing just 14% year over year. At the same time, its homes segment grew revenue by 26%, while its nascent mortgages segment climbed 73%. It's these newer, high-growth businesses that should have investors most excited. Zillow's adjusted EBITDA grew to an all-time high last year, which bodes well for the company's future profitability.
By reaching into every corner of the real estate transaction, Zillow has dramatically expanded its opportunity, as management estimates its total addressable market (TAM) has increased from $19 billion to more than $2.2 trillion. The company generated just $3.3 billion in revenue last year, which highlights the long and lucrative road ahead.
Zillow was in ARK Invest's shopping cart again last week, as ARK Next Generation Internet and ARK Innovation were both scooping up shares. The online realtor now represents 2.36% and 3.46% of the funds' holdings, respectively, and is a Top 10 holding in both funds.
Data by YCharts
The fine print
Given the striking results of the ARK Invest ETFs last year, it's hard to find fault with Wood's stock picking acumen, but the devil's in the details. With a significant concentration in technology, only two of the five flagship ETFs are beating the S&P 500 so far this year, while three are beating the NASDAQ -- but 2021 is still young.
It's also worth noting that while all three of these stocks were market-beating investments last year, they're not cheap using traditional valuation metrics. Twilio, Teladoc, and Zillow are selling for 23, 15, and six times sales, respectively -- when a good price-to-sales ratio is generally between one and two.
That said, investors -- including Cathie Wood -- have been willing to pay up for the cutting-edge technology, secular tailwinds, and massive addressable markets that each of these companies offers.
