Cathie Wood has been making waves in the investing world for several years, but really came into her own last year. The founder and CEO of ARK Investment Management made her mark in 2020 when her five flagship exchange-traded funds (ETFs) crushed the results of the broader market, each delivering gains of more than 100%.
Given these spectacular results, investors have been paying particular attention to ARK Invest's purchases of emerging and disruptive technology stocks that paid off so well last year. While these picks make a great starting point, I like to dig a little deeper, looking for companies with an industry-leading position, robust secular tailwinds, and a large and growing total addressable market, to better increase my chances of finding winning investments.
Let's look at three stocks Wood added last week that meet these lofty criteria.
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Unity Software: Providing the building blocks for games and much more
ARK Innovation (ARKK -2.32%) ETF focuses on disruptive technology that could potentially change the world, which likely contributed to its decision to load up on Unity Software (U -2.95%). The company's platform provides the building blocks to create and operate real-time 3D content. Developers use the technology to create mobile, PC, and console games, but that's just the beginning. Unity's software is also used by artists, architects, automotive designers, and filmmakers to create 2D and 3D graphics, as well as content for virtual reality (VR).
Last year was a breakout one for Unity. In the fourth quarter, monthly active users (MAUs) rose to 2.7 billion per month, up 63% year over year. Apps built using its platform were downloaded 5 billion times, up 41%, and Unity was responsible for 71% of the top 1,000 mobile games.
This pushed total revenue of $772 million, up 43% for 2020, while its gross margin hovered near 78%. Unity isn't yet profitable, as it scrambles to attract users that will increase the company's leverage. Additionally, Unity surpassed an important milestone late last year. While the company burned through cash for most of 2020, it turned free cash flow positive in the fourth quarter.
Management estimates Unity Software's total addressable market at roughly $29 billion, so its current revenue is just a drop in the bucket compared to its massive opportunity. Add in the accelerating adoption of video games and the additional potential offered by virtual reality, and the size of the opportunity becomes clearer.
These factors no doubt led Wood to increase ARK Innovation ETF's position in Unity Software last week, bringing it to 2.59% of the total $22.28 billion in funds under management, and making it the fund's 12th largest position overall. It's also worth noting that two other ARK funds hold significant positions in Unity Software, and both increased their exposure last week.
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JD.com: China's largest online retailer
As the name suggests, ARK Autonomous Technology & Robotics (ARKQ -1.09%) ETF is focused on cutting-edge autonomous and robotics technology, as well as automation and manufacturing. This likely contributed to the decision to add to an already substantial stake in JD.com (JD -0.07%).
The company holds the distinction of being China's largest online retailer, its biggest overall retailer, and the country's highest-grossing internet company by revenue. E-commerce simply isn't possible without a degree of automation, making it a perfect fit for the fund. JD.com stock is down 30% over the past couple of months, caught up in the overall tech downturn, and compounded by the negative sentiment weighing on Chinese stocks -- a fact that clearly didn't escape Wood's notice.
JD.com continued its compelling growth trajectory last year, with revenue topping $114 billion in 2020, up 29% in local currency, resulting in net income of $7.6 billion, up 57%.
The Chinese e-commerce giant was already a significant holding of the ARK Autonomous Technology & Robotics ETF, and now represents 5% of the fund's $3.33 billion in funds under management -- making it the fund's fourth-largest holding. It's worth noting that JD is also a 5% holding in the ARK Space Exploration & Innovation (ARKX -1.66%) fund and roughly a 2% holding in each of the ARK Next Generation Internet (ARKW -2.61%) and the ARK Fintech Innovation (ARKF -2.92%) ETFs.
China is the world's largest e-commerce market, generating more than $1.7 trillion in sales each year. That said, online sales still account for just 25% of total retail, leaving plenty of room for JD.com to continue its impressive growth.
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Exact Sciences: Detecting cancer with a simple blood test?
In its quest to find technology that could change the world, the ARK Innovation ETF believes it may have found just that in Exact Sciences (EXAS -5.50%). While the name of the company may not ring any bells, investors have likely heard of its ubiquitous Cologuard colon cancer screening test.
Exact Sciences has much grander ambitions, however, as it's one of the growing number of companies racing to market a liquid biopsy test -- a simple blood test that can be used to detect a wide range of cancers. Early detection and treatment have long been regarded as key to the fight against cancer, making these tests something of a holy grail for healthcare companies.
Last year, Exact Sciences generated revenue of $1.49 billion, up 70% compared to 2019, but its losses surged as the company poured money into its research and development and marketing budgets. Exact Sciences is racing to capture its share of a variety of market opportunities that total more than $62 billion.
With last week's purchases, Exact Sciences has grown to a nearly 3% holding in ARK Innovation's $22.28 billion in funds under management. That's not all. It's also a 5% holding in the ARK Genomic Revolution (ARKK -2.32%) ETF's $9.44 billion in funds under management, making it the fund's second-largest position.
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The fine print
Given the impressive results that Wood racked up last year, it would almost seem like a no-brainer to follow suit, but her noteworthy record notwithstanding, these stocks simply aren't for everyone. Some come with higher-than-average risk. Additionally, in terms of traditional valuation metrics, two of the three aren't cheap. Unity Software and Exact Sciences are selling for 29 and 13 times sales, respectively -- when a good price-to-sales (P/S) ratio for a stock is generally between one and two. For context, JD.com's P/S ratio is one -- making it the clear bargain of the three.
All three stocks have delivered market-beating gains. JD.com and Exact Sciences have returned 67% and 66%, respectively, over the past year. Unity Software only went public in September, but has since surged 46%. Each of these stocks offers the trifecta of an industry-leading position, secular tailwinds, and a significant addressable market, which combine to create that potential for explosive profits.
