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Cathie Wood Is Buying These Top Growth Stocks -- and Both Could Make You Rich

By Trevor Jennewine - Jul 7, 2021 at 6:26AM

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Learning from successful stock pickers can help you beat the market.

Cathie Wood has recently become a household name for many stock pickers. Under her management, the Ark Innovation ETF has skyrocketed 181% over the last three years, crushing the 60% return of the S&P 500.

So what's her secret? Cathie Wood invests with a long-term mindset, focusing on innovative technologies rather than short-term catalysts. To that end, Ark recently added shares of Tesla (TSLA 4.67%) and Zillow Group (Z 2.96%) (ZG 2.61%) to its portfolio. Here's what investors should know.

Investor holding upward trending bar graph that fades from red to green.

Image source: Getty Images

Tesla

CEO Elon Musk has long said that manufacturing efficiency would be one of Tesla's greatest advantages, and now the company has data to back that bold claim. Last year, Tesla expanded its production capacity in the U.S. and China, helping it achieve an industry-leading operating margin of 6.3%.

Moreover, with just two factories, Tesla sold 184,500 electric vehicles (EVs) in the first quarter of 2021, capturing an industry-leading 16% market share. To add to that achievement, even without a single factory in Europe, Tesla's Model 3 recently surpassed the BMW 3 series to become the best-selling luxury sedan worldwide.

Tesla Model 3 in motion, surrounded by snowcapped mountains.

Image source: Tesla

So what's driving this efficiency? In addition to a highly automated production process, Tesla has a significant cost advantage. It pays just $142 per kilowatt-hour (kWh) for its battery cells -- 24% less than the industry average, according to Cairn Energy Research. And the company is doubling down on that advantage.

In Sept. 2020, Tesla announced its latest innovation: the 4680 battery cell. This new technology will reduce production costs 56%, increase EV range by 54%, and cut capital expenditures by 69%. Moreover, Musk believes the 4680 will allow Tesla to build "a very compelling $25,000 electric vehicle that's also fully autonomous" in the next three years.

Looking ahead, research from Deloitte suggests EV sales will grow at 35% per year through 2025, reaching 11.2 million. However, Tesla thinks it can grow deliveries even more quickly, at 50% annually over a multi-year horizon. That positions the company to gain market share over the long term.

Tesla is Ark's largest holding, and the firm believes Tesla stock could reach $3,000 per share by 2025. That's a 360% premium compared to its current share price. If Ark is right, Tesla investors will see a huge windfall going forward.

Zillow Group

Zillow Group is reimagining real estate. The company takes a digital-first approach to the housing and rentals market, relying on its web and mobile apps to engage potential clients. Zillow's online listings received an industry-leading 9.6 billion visits in 2020. That scale is a significant advantage, helping the company keep its acquisition costs low compared to those of rivals.

But listing homes online is hardly revolutionary. It's Zillow's ability to simplify the process of buying or selling a home that is truly disruptive. For instance, the company's patented Zestimate technology brings greater transparency to real estate transactions, giving consumers access to home value estimates in real-time.

For Sale sign bearing Zillow's brand name.

Image source: Zillow Group.

Moreover, in addition to connecting buyers with local brokers, Zillow provides access to title, escrow, and mortgage services, reducing the number of parties involved in a typical real estate transaction. Its platform also allows buyers to tour homes virtually and make offers online. That may sound crazy, but a recent study suggests the industry may be moving toward e-commerce as 39% of millennials report feeling comfortable "buying a home online."

On the flip side, Zillow also buys homes directly from sellers. In fact, its AI-powered Zestimate is now an actual cash offer in over 20 U.S. metropolitan areas, and the company plans to expand that feature to additional markets in the future. Sellers opting to go this route benefit from a less complex experience, since they never have to prep homes for showings or pay for repairs.

Zillow's disruptive approach has powered strong sales growth in recent years. Moreover, the company is free-cash-flow positive, meaning it can afford to grow its business without issuing new shares or debt. That bodes well for the future.

Metric

2017

Q1 2021 (TTM)

CAGR

Revenue

$1.08 billion

$3.43 billion

43%

Free cash flow

$179.6 million

$276.9 million

14%

Data source: Zillow SEC filings. TTM = trailing 12 months. CAGR = compound annual growth rate.

Looking ahead, Zillow has a massive market opportunity. In fact, assuming a 5% commission charge, existing home sales in the U.S. generated $94 billion in brokerage fees alone last year. And that figure doesn't account for fees related to title, escrow, or mortgage services. In other words, this real estate disruptor has plenty of room to grow its business.

Trevor Jennewine owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends BMW. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$900.09 (4.67%) $40.20
Zillow Group, Inc. Stock Quote
Zillow Group, Inc.
ZG
$39.67 (2.61%) $1.01
Zillow Group, Inc. Stock Quote
Zillow Group, Inc.
Z
$39.63 (2.96%) $1.14
Bayerische Motoren Werke Aktiengesellschaft Stock Quote
Bayerische Motoren Werke Aktiengesellschaft
BMWYY
$27.10 (1.12%) $0.30
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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