ARK Invest CEO Cathie Wood seems to have taken the investing world by storm. In 2020, Wood's flagship ARK Innovation ETF (ARKK +3.92%) outperformed the greater market by nearly 9x -- 149% versus 16% -- and earned her Bloomberg News designation as best stock picker that year.
With a focus on disruptive technology, it makes sense that ARK's exchange-traded funds would embrace crypto, but the strong conviction ARK's investments are showing to the sector is still a bit shocking. Last year, Wood assigned a $500,000 per coin price target for Bitcoin (BTC +0.06%), one of the most ambitious predictions on Wall Street! Unsurprisingly, ARK is well on its way to creating a Bitcoin-focused ETF.
With the crypto bear market starting to show a rebound, you don't have to wait for ARK's new ETF to get in on the positive returns. Here are three growth stocks Wood owns that are active in crypto's adoption and stand to benefit.
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1. Robinhood: Derided as a meme stock, but it has a bright crypto future
Despite being on the public markets for only a short time, upstart online brokerage Robinhood Markets (HOOD +2.62%) has made a splash. The first week saw whiplash-inducing volatility, with a disappointing debut, a massive rally that saw share prices more than double in a few trading days, and a correction-level price drop after the company announced a massive follow-on share offering. The app that contributed heavily to the meme-stock trend appears to be a meme stock itself.
Robinhood's envious user growth has partly been due to its tremendous success among younger traders. At one point, the company disclosed that nearly 80% of its user base was under age 35, a highly coveted demographic for financial services firms as these investors have most of their earning and investing lives ahead of them.
In addition to zero-commission trading, Robinhood's crypto capabilities helped the company win this demographic. Robinhood is in high-growth mode. The company disclosed that 2020 full-year revenue grew 245% over the prior year to $960 million. A significant portion of that growth was connected to cryptocurrency trading. The company followed that up with a massive first quarter that saw revenue increase 309% from the prior period to $522 million.
Although Robinhood's opportunity is vast, there are increasing risks in its primary stock trading business. A series of high-profile operational failures -- including trading outages during the GameStop frenzy and data breaches -- have placed the brokerage in the crosshairs of the Securities and Exchange Commission.
Additionally, its primary monetization model of payment for order flow is now being copied by incumbent brokers with larger asset bases, educational materials, and customer support. Robinhood's embrace of cryptocurrency functionality is quickly becoming the true differentiator versus traditional stock brokerage firms, and the company is wise to focus on building out its crypto functionality.
2. Square: Using Bitcoin to improve its flywheel
The ARK Innovation ETF stock has sold off from recent highs, but you can't blame its stake in Square (SQ 0.59%). Shares of the digital payments company have advanced nearly 90% in the last year.
Traditional banking continues to avoid cryptocurrency, which has created an opportunity for financial technology, aka fintech, companies. Square has been aggressive on this front, adding the ability to buy and sell Bitcoin in 2018 through its peer-to-peer financial network Cash App. Bitcoin has been instrumental is helping Cash App's flywheel effect, in which added services increase user engagement.
In the short run, however, it could be Square's other business that powers the company higher. Last year Square's seller ecosystem was decimated by COVID-19. The company's host of card readers and POS systems are popular with smaller business owners like restaurants, coffee shops, nail salons, and bars, which bore the brunt of pandemic lockdowns.
Despite that, Square was able to help its vendors quickly build out their online presence and grow card-not-present transactions. At year-end, seller gross payment volume (GPV) was flat despite significant headwinds. In the most recent quarter, GPV jumped 86% over the prior year, helping to power total revenue growth of 87% (minus Bitcoin).
However, CEO Jack Dorsey has high expectations for Bitcoin, proclaiming it would be the world's "single currency" within 10 years in 2018. He continues to lead by helping to form the Crypto Council for Innovation with Coinbase (COIN +0.11%) and Fidelity. Square will be instrumental in increasing Bitcoin adoption.
3. Coinbase: Looking to further institutional Bitcoin adoption
Out of the three companies, Coinbase is more tethered to the underlying price of crypto. Coinbase operates multiple crypto-based currency exchanges, so it indirectly benefits from rising crypto prices, as it serves as a form of marketing for new users looking to trade. Directly, Coinbase uses percentage-based transaction fees, which benefit from higher revenue per transaction when crypto prices are higher.
While crypto has been in a bear market lately, that isn't always a bad thing. As a broker, Coinbase also benefits from crypto crashes (at least short-term). Exchanges tend to do well whenever volatility is high, because fast-moving markets are the biggest driver of transactions. Although prices might be lower, transactions and engagement will increase from people looking to buy dips and "paper-hands" looking to lock in profits or prevent deeper losses.
However, Coinbase is leading efforts to expand the cryptocurrency ecosystem and create more revenue sources than retail trading by increasing institutional adoption. Coinbase recently acquired Bison Trails, now known as Coinbase Cloud. The IaaS platform allows institutions to quickly integrate blockchain infrastructure into their operations. As of the first quarter, Coinbase had more than 8,000 institutions on its platform that conducted 64% of its total trading volume.
With that deep (and still growing) institutional userbase, it's likely Coinbase will be on the vanguard of Bitcoin adoption.
