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3 Cathie Wood Stocks to Buy and Hold for 10 Years

By Chris Neiger, Danny Vena, and Brian Withers - Apr 24, 2021 at 8:15AM

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You don't have to be an ARK investor to benefit from these fantastic tech stocks.

ARK Invest CEO Cathie Wood has attracted a following on Wall Street as investors have seen her company's ETFs return huge gains. For example, her ARK Innovation ETF is up 300% over the past three years.

Of course, investors don't have to buy one of Wood's funds to benefit from the stocks that are in them. We asked three Motley Fool contributors to find great tech stocks in ARK funds that could make fantastic 10-year investments, and they came back with Square (SQ 3.97%), Cloudflare (NET 4.91%), and Roku (ROKU 2.15%). Here's why. 

A white line graph on dark background.

Image source: Getty Images.

An ever-expanding financial ecosystem

Danny Vena (Square): With Wood's focus on emerging and disruptive technologies, it's little wonder that digital payments is one of the trends on her radar. In fact, the ARK Fintech Innovation exchange-traded fund (ETF) is devoted entirely to mobile payments, digital wallets, peer-to-peer lending, blockchain technology, and risk transformation. It also isn't too much of a surprise that fintech pioneer Square is the ETFs largest holding, at 10.5% of $4 billion in funds under management.

Square offers a host of services that help small- and medium-sized enterprises (SMEs) get their businesses up and running. In addition to its point-of-sales dongles, the company provides tools to help entrepreneurs navigate e-commerce, social media integration, invoicing, billing, and even small-business loans.

Just this week, Square announced the rollout of new inventory-management tools for retail sellers, giving them improved ability to add new products, count existing stock, and reorder inventory. This helps illustrate the ever-expanding capability of Square's offerings.

Beyond small business, Square has been expanding in the consumer-payments market with the rapid adoption of its Cash App. The peer-to-peer mobile-payments platform began as a way for friends to send money or split a bill, but it, too, is evolving.

Cash App lets users link an existing bank account to facilitate funds transfers and can get an optional debit card -- called Cash Card -- for use at ATMs and physical retail stores. The app also encourages direct deposit and stock investing, which helps boost user engagement.

Another big opportunity for Square is the growing interest in cryptocurrency. The company was among the first to allow users to buy and sell Bitcoin back in 2018. Square reported 3 million active customers transacted in the cryptocurrency in 2020, but use is accelerating: In January 2021, more than 1 million customers purchased Bitcoin for the first time using the Cash App. 

The versatility of Cash App continues to drive new-user growth. Square closed out 2020 with 36 million monthly transacting customers, up 50% year over year. For the fourth quarter, Cash App generated revenue of $416 million, up 127% year over year (excluding Bitcoin). That isn't an anomaly either, as Cash App revenue grew 137% in 2020. More importantly, each new cohort of users is more engaged and more profitable, which bodes well for future growth.

In the fourth quarter of 2020, Square's total net revenue grew to $3.16 billion, up 141% year over year. At the same time, operating income of $45 million surged 160%. 

Given the tailwinds created by the ongoing shift toward omnichannel commerce, contactless payments, digital wallet, and cryptocurrency adoption, Wood is keenly aware that Square is sitting at the intersection of several strong and growing secular trends, providing the stock much more room to run over the coming decade. No wonder she owns so much of it.

A multicolored cloud on a black background.

Image source: Getty Images.

The future is in the clouds

Brian Withers (NET): The internet is getting more crowded every day. With more data, more websites, and more users than ever, businesses that want to stand out need to have fast and responsive websites for their customers. Enter Cloudflare and its mission to help build a better internet.

The company offers products to provide customers more secure, more reliable, and high-performing websites and cloud applications. Not surprisingly, business is booming and is probably part of the reason why Cathie Wood has this stock in her ARK Next Generation Internet ETF

To end 2020, the company put up 50% year-over-year revenue growth for its fourth quarter and full-year revenue growth. As its customers come on board with the serverless cloud products, they tend to grow their spending over time. Dollar-based net retention has been 115% or higher for the last eight quarters, and customers spending more than $100,000 annually are growing at a torrid pace. For the coming year, management is forecasting the growth to continue with at least $589 million on the top line, a 37% year-over-year gain.

Metrics

Q4 FY2019

Q3 FY2020

Q4 FY2020

QoQ Change

YoY Change

Revenue

$84 million

$114 million

$126 million

14%

50%

Customers >$100k annual spend

526

736

828

13%

57%

Dollar-based net retention

119%

116%

119%

+3%

-

Data source: Company earnings reports. QoQ = quarter over quarter. YoY = year over year.

What's even more impressive is Cloudflare's commitment to innovation. With a series of new products over the last several years, it's able to tackle a much bigger market.

In 2018, its addressable market was estimated at $32 billion. But now with the addition of its network and zero trust services, its opportunity has more than doubled to $72 billion and is expected to grow to $100 billion by 2024. A recent partnership announcement with NVIDIA will enable the company to ride the tailwinds of the artificial intelligence growth trend, too.

As with many of the cloud stocks, the company's valuation is steep at a 51 price-to-sales ratio. But for a company with a history of innovation, a huge and growing market, and a proven track record of growth, this is one stock you'll be happy you bought a decade from now.

If you're nervous about getting in at this lofty valuation, a suggestion would be to buy in thirds. This way, you would benefit no matter what the stock does over time. If it dips, you can take advantage of a better price; if it goes up, you'll be happy you own a few shares. Maybe it's time you added this Cathie Wood favorite cloud specialist to your portfolio. 

A couple sitting on a couch. He has a remote in his hand as he looks at a TV, and she's looking at a laptop computer.

Image source: Getty Images.

An innovative video-streaming play 

Chris Neiger (ROKU): Video-streaming services have become very popular over the past few years as companies have followed in Netflix's footsteps by creating their own original content and snatching up streaming rights to existing content. Amazon, Apple, Disney, Hulu, HBO, and a host of other companies all have popular streaming services, and each of these competitors have something in common -- they all have their services on Roku's platform. 

Roku's video-streaming platform benefits no matter which company is winning the streaming wars. The company takes a cut of every subscription service that a user signs up for on its platform, and that's led to massive growth. 

The company's sales increased 58% in the most recent quarter to $649.9 million, and non-GAAP earnings per diluted share reached $0.49, outpacing Wall Street's consensus estimate of a loss of $0.05 per share. 

Roku also ended the quarter with an impressive 51 million active users, up from 37 million in the year-ago quarter. And all of those users have increased their spending on Roku's platform, as well, as the average revenue per user (ARPU) jumped 24% year over year. 

Platform revenue (when users sign up for video-streaming service through Roku) is the company's bread and butter right now, but Roku is also expanding its advertising opportunity, as well. The company recently purchased Nielsen's ad-technology unit, which should help it move into new areas of TV advertising. But even without the purchase, Roku's ad segment was doing very well, with monetized video-advertising impressions more than doubling in the fourth quarter on a year-over-year basis.

With all of this growth, it's no wonder why Roku's stock has returned 188% over the past 12 months and why Cathie Wood has 3.6 million shares of the company in her ARK Innovation ETF. Savvy investors looking for a fast-growing tech stock that they can hold onto for the next decade would be wise to follow Wood's lead and add this video-streaming platform to their portfolios.

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Stocks Mentioned

Roku Stock Quote
Roku
ROKU
$83.91 (2.15%) $1.77
Block, Inc. Stock Quote
Block, Inc.
SQ
$63.90 (3.97%) $2.44
Cloudflare, Inc. Stock Quote
Cloudflare, Inc.
NET
$45.90 (4.91%) $2.15

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

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