ARK Innovation ETF (ARKK 0.07%), the flagship fund of celebrated growth investor Cathie Wood, has been one of my worst-performing investments this year. I initially bought the ETF in mid-February to gain some exposure to higher-growth stocks that I didn't want to take larger positions in. Unfortunately, many of ARK's stocks fell in tandem as higher bond yields sparked a rotation from growth stocks to value stocks. Rising vaccination rates also exacerbated the pain for many companies that had previously benefited from remote work and other stay-at-home measures.
I'm not too worried about ARK Innovation's recent decline since it only represents 1.8% of my portfolio and I don't plan to sell my shares anytime soon. However, we should still take a look at a few of ARK Innovation's top holdings to see why they could struggle in a post-pandemic world.
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1. Zoom Video Communications
Zoom (ZM 0.05%), which became synonymous with video calls during the pandemic, now accounts for over 3% of ARK Innovation's holdings, up from less than 1% last October. ARK significantly increased that stake after Zoom's latest quarterly report in early March, and Wood boldly declared the platform would "usurp" older telecom companies during a subsequent interview.
Zoom's growth rates seem to support that thesis. Its revenue soared 326% to $2.65 billion in fiscal 2021, which ended this January, while its adjusted net income surged 833% to $996 million.
In fiscal 2022, Zoom expects its revenue to rise 42% to 43%, and its adjusted earnings to grow 7% to 9%. That forecast is solid, especially considering how tough the year-over-year comparisons are, but its stock also seems priced for perfection at more than 80 times forward earnings and 26 times this year's sales.
Those frothy valuations, along with concerns about a gradual slowdown and competition from other platforms like Facebook's Messenger Rooms and Cisco's Webex, have been weighing down Zoom's stock over the past few months.
2. Shopify
Shopify (SHOP -2.37%) -- the Canadian e-commerce services company that helps companies build their own websites, launch marketing campaigns, process payments, and fulfill orders -- thrived throughout the pandemic as smaller businesses relied heavily on online orders.
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Shopify now accounts for over 3% of ARK Innovation's holdings, up from about 0.5% last November. The company's revenue soared 86% to $2.93 billion in fiscal 2020, its gross merchandise volume surged 96% to $119.6 billion, and its adjusted net income jumped 14 times year over year to $491 million.
Shopify now serves more than a million businesses worldwide, and its decentralized self-service platform continues to attract merchants that don't want to be tethered to Amazon (AMZN -1.64%).
But just like Zoom, Shopify's growth could decelerate after the pandemic passes. Analysts expect its revenue to rise 39% this year, but for its earnings to stay nearly flat as it ramps up its spending again.
That slowdown could make it tough to justify its high valuations this year. Shopify trades at over 230 times forward earnings and 35 times this year's sales, which makes it even pricier than Zoom.
3. Roku
Roku (ROKU 0.15%), the market leader in streaming media devices, generated robust growth throughout the pandemic as stay-at-home measures sparked strong sales of its hardware, which supports the expansion of its advertising and partnership-driven software platform.
Roku accounts for over 5% of ARK Innovation's portfolio, and that percentage has held steady over the past six months. The company's revenue rose 58% to $1.78 billion in fiscal 2020, and it ended the year with 51.2 million active accounts, up 39% from the end of 2019.
Its total number of streaming hours increased 55% year over year to 17 billion in the fourth quarter, and its average revenue per user grew 24% to $28.76 as it unlocked more ways to monetize its platform. Roku's net loss also narrowed, from $59.9 million in 2019 to $17.5 million in 2020, and its adjusted EBITDA surged 319% to $150 million.
Those growth rates crush the bearish notion that other streaming devices and platforms, such as Amazon's Fire TV, will render it obsolete. However, Roku credits a lot of its recent growth to the pandemic, and analysts expect its revenue to rise 44% this year, with a wider net loss.
Roku trades at about 17 times this year's sales. That high price-to-sales ratio could limit its upside potential this year as it faces tough year-over-year comparisons. However, the stock will likely remain a top play on the secular shift away from traditional pay-TV platforms for the foreseeable future.
The bottom line
Zoom, Shopify, and Roku all share similar qualities: They all owe some of their growth to the pandemic, trade at high valuations, and face tough comparisons this year. However, all three companies could potentially disrupt their respective markets -- so it might not be a great idea to bet against these stocks, or ARK Innovation's other top holdings, over the long term.
