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2 Tech Stocks That Cathie Wood's ARK Invest Is Buying

By Trevor Jennewine - Apr 21, 2021 at 8:40AM

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These stocks could help investors beat the market.

ARK Invest is far from the biggest investment firm on Wall Street, with just $37.6 billion in managed assets spread across 244 holdings as of Dec. 31, 2020. Even so, CEO Cathie Wood is gaining a reputation as one of Wall Street's best stock pickers. Her company's most popular product -- the ARK Innovation ETF (ARKK 4.19%) -- has significantly outperformed the broader market over the last five years, surging 540%.

Recently, ARK has been purchasing shares of Palantir Technologies (PLTR 5.20%) and Twilio (TWLO 1.54%) for its flagship ETF. Given ARK's track record, investors might want to consider these stocks for their own portfolios. Let's take a closer look at these two stocks that Cathie Wood's team has shown so much investing interest in.

1. Palantir: Big data analytics

Palantir serves both government and commercial clients, providing software that helps organizations manage, integrate, and analyze massive amounts of data. It also focuses on protecting privacy, and its solutions allow clients to monitor and control access to information.

Explosive growth concept art featuring rock in flight surrounded by digital icons.

Image source: Getty Images.

As a practical example, aircraft manufacturer Airbus uses Palantir's Foundry software to track 5 million parts and coordinate the engineering efforts of hundreds of teams spread across eight factories in four different countries.

Likewise, in the government sector, the U.S. Army uses Palantir's Gotham software to manage over 1 million military personnel, identify patterns in datasets, and make informed decisions that may be the difference between life and death.

One of Palantir's key advantages is the environment-agnostic nature of its software. Its platforms can be deployed in any public or private cloud, including classified government networks. And the company's continuous delivery system, Palantir Apollo, performs automatic updates with no downtime, ensuring clients always have access to cutting-edge capabilities.

Apollo also allows Palantir's software-as-a-service (SaaS) to function in places where other SaaS company's can't operate. For instance, its software can run on disconnected laptops in a Humvee, on servers in the hull of a submarine, and in aircraft flying at 30,000 feet. This gives the company a big advantage over its rivals.

Palantir ended last year with 139 customers across 40 industries. Notably, the average revenue per customer jumped from $5.2 million in 2018 to $7.9 million in 2020. That has powered strong top-line growth.

Metric

2018

2020

Change

Revenue

$595 million

$1.1 billion

36%

Data source: Palantir SEC filings.

Despite the company's controversial past, the future looks promising for Palantir. As the world becomes increasingly digital, enterprises are creating more data at a phenomenal pace. In order to carve out a competitive edge, they need a way to manage and make sense of that data. And Palantir's software looks like a perfect fit.

2. Twilio: Customer engagement

Twilio's communications platform simplifies software development, allowing clients to easily build apps that incorporate features like voice, text, video, and email. This makes it possible to send shipping notifications and appointment reminders, provide chat support to consumers, enable video conferencing with clients, and implement two-factor authentication, among many other use cases.

Software developer at Twilio.

Image source: Twilio

In addition to these building blocks, Twilio also provides more complete solutions. For example, Twilio Frontline is a mobile application that launched during the pandemic. It enables employees to connect with and assist customers regardless of whether they are in an office or working remotely.

Altogether, Twilio's communications platform powers over 1 trillion human interactions each year. That impressive statistic has translated into strong growth for this company.

Metric

2018

2020

CAGR

Revenue

$650 million

$1.8 billion

65%

Data source: Twilio SEC filings. CAGR = compound annual growth rate.

Notably, Twilio is not currently profitable. The company posted net income losses of $179 million in 2020 due to substantial investments in sales and marketing, as well as research and development.

I think this strategy makes sense, though. Twilio had a $79 billion market opportunity in 2020, according to management, and that figure should continue to grow in the years ahead. It's important for Twilio to grab as much of that market as possible right now, meaning the company needs to focus its resources on growth.

As its business continues to scale, operational expenses should shrink on a relative basis. That should eventually lead Twilio to profitability. And with a gross margin of 52% in 2020, Twilio is poised to be a very profitable company. However, investors should monitor revenue growth to make sure Twilio is on the right track.

As a final thought, enterprises were forced to find new ways to interact with consumers during the pandemic. Not surprisingly, Twilio's platform saw increased adoption last year, and that trend is unlikely to reverse. In a recent survey, Twilio found that 95% (of 2,500 enterprises) plan to maintain or increase their investment in digital customer engagement post-pandemic. That should power continued growth for this tech company in the years ahead.

Trevor Jennewine owns shares of Palantir Technologies Inc. and Twilio. The Motley Fool owns shares of and recommends Palantir Technologies Inc. and Twilio. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Palantir Technologies Inc. Stock Quote
Palantir Technologies Inc.
PLTR
$9.91 (5.20%) $0.49
Twilio Inc. Stock Quote
Twilio Inc.
TWLO
$86.90 (1.54%) $1.32
ARK ETF Trust - ARK Innovation ETF Stock Quote
ARK ETF Trust - ARK Innovation ETF
ARKK
$52.01 (4.19%) $2.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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