ARK Investment Management CEO Cathie Wood's love for Tesla and the electric vehicle sector is no secret. However, Wood is now showing interest in two more disruptive trends, digital wallets and genomics, which she expects to be the next big things after electric vehicles. To leverage these trends, the legendary fund manager has placed big bets on fintech player PayPal Holdings (PYPL -1.30%) and pure-play diagnostics company Exact Sciences (EXAS -8.35%).
Both of these stocks are riding solid secular growth trends, and both could potentially emerge as even bigger winners than Tesla in the coming months.
PayPal accounts for 4.4% and 2% of holdings, respectively, in the ARK Fintech Innovation ETF and the ARK Next Generation Internet ETF. The digital payment company's share price soared in 2020 after the coronavirus pandemic forced people to rapidly transition from an in-person to an online way of life. Although the stock fell almost 30% from its all-time high during the February tech sell-off, it now seems to be on a path of recovery.
The digital payments market was estimated to be worth $58.3 billion in 2020 and is expected to grow at a compound annual growth rate (CAGR) of 19.4% from 2021 to 2028. Considering the huge opportunity unfolding, PayPal's offerings in areas such as peer-to-peer payments, cashless payments for online and offline purchases, and credit have been in huge demand. In fact, the company recorded 72.7 million new accounts and reached a total of 377 million in 2020, and total payment volume (TPV) jumped by 31% year over year to $936 billion. PayPal aims to increase active accounts to 750 million and TPV to $2.8 trillion by 2025. Increasing customer accounts will attract more merchants, which in turn will fuel TPV. This network effect will make it even more difficult for customers to switch from the PayPal platform. PayPal is expecting revenue of $25.5 billion in 2021 and over $50 billion by 2025.
PayPal's total annual transactions per active account have soared from 28.1 in 2015 to 42.7 in 2020. But the company remains focused on improving the monetization of its active accounts and on creating a sticky customer base. To that effect, PayPal acquired discount discovery platform Honey Science Corporation for a total cash consideration of $4 billion. PayPal's foray into the cryptocurrency space -- building the infrastructure to enable consumers and merchants to buy, sell, and hold Bitcoin across PayPal and Venmo apps and to use it for e-commerce across a network spanning 29 million merchants on PayPal -- should further boost consumer engagement, especially among the more digitally savvy Gen Z and millennial populations.
PayPal is also on its way to becoming an immensely profitable company. Management is guiding for 22% CAGR in adjusted earnings per share (EPS) from 2020 to 2025 and expects to generate over $40 billion of free cash flow in the next five years, which means more resources available for organic and inorganic investments as well as for returning value to shareholders through buybacks.
PayPal is not a cheap stock, considering that it trades at 14.6 times trailing-12-month sales. But this profitable and cash-rich company is at the helm of a huge digital payment opportunity, and investors could earn handsome returns even if they invest in this stock at these elevated levels.
2. Exact Sciences
Exact Sciences makes up 4.9% and 2.8% of the ARK Genomic Revolution ETF and ARK Innovation ETF, respectively. The company offers two major products: Cologuard, a non-invasive stool-based DNA screening test for detecting colorectal cancer, and Oncotype DX, a range of genomic tests that help physicians make personalized treatment decisions (precision oncology) for a range of cancers.
With more than 227,000 tests ordered since 2014, Cologuard continues to be the major revenue driver. In October 2020, the U.S. Preventive Services Task Force recommended colorectal cancer screening for the 19 million people in the age group of 45 to 49 (previously, the recommendation was for those over 50). This could be a big opportunity for Cologuard, considering that working people will generally prefer a less time-consuming and non-invasive test over a traditional colonoscopy.
The robustness of Exact Sciences' offerings became apparent in 2020, when revenue jumped over 71% year over year to $1.49 billion, despite the pandemic making it difficult for sales personnel to reach out to physicians and patients. Cancer screening, precision oncology, and COVID-19 testing accounted for $815 million, $441 million, and $236 million, respectively, of fiscal 2020 sales.
Detecting cancer in the early stages has been associated with significant improvement in treatment outcomes. To expand its capabilities in areas such as early multi-cancer screening and late-stage cancer therapy selection, Exact Sciences has been focused on targeted acquisitions in the last few months.
To that effect, the company acquired Thrive Earlier Detection for $2.15 billion. This deal adds Thrive's early-stage blood-based screening test, CancerSEEK, which has demonstrated significant accuracy in detecting cancer biomarkers from blood samples in clinical settings, to Exact Sciences' portfolio. The company also acquired Base Genomics for its DNA methylation analysis technology, used in early-stage cancer detection) to improve the accuracy of its cancer detection tests. Finally, the acquisition of Ashion Analytics has provided Exact Sciences with the technology to develop tests enabling late-stage cancer therapy selection, detection of residual disease (checking whether tumor cells were missed in treatment), and cancer recurrence monitoring. Management estimates the colorectal cancer, multi-cancer screening, and residual disease testing and cancer recurrence monitoring markets to be worth $18 billion, $25 billion, and $15 billion, respectively.
Trading at 14.7 times its trailing-12-month sales, the yet-to-be-profitable Exact Sciences is not a cheap stock. However, the company seems to have just scratched the surface of the global cancer diagnostics market opportunity, estimated to be worth over $184.7 billion by 2026. Patient investors stand a chance to earn huge returns from this healthcare stock in the coming years.