Cathie Wood was the darling of Wall Street last year as her ARK funds smashed the returns of the overall market. But what a difference a year makes! So far in 2021, her flagship ARK Innovation ETF (ARKK -0.66%) is actually losing money, while the S&P 500 has surged to an 18% gain year to date.
Investors may be wondering if they should dump their tech stocks and run to safer dividend plays, but our Fool contributors have different ideas. They've found three beaten-down Cathie Wood favorites that should outpace the market over the next three to five years. Let's find out why they think you should take a hard look at Twilio (TWLO -1.59%), Roku (ROKU 1.58%), and Zoom Video Communications (ZM -0.99%).
Image source: Getty images.
Twilio: A high-tech growth stock at a discount
Will Healy (Twilio): Twilio has become one of the more significant holdings in Cathie Wood's ARK Innovation ETF and two other ARK Invest funds. The communications platform-as-a-service (CPaaS) company has lost over one-quarter of its value since February. Nonetheless, rather than signaling more downside, the pullback may provide an opportunity to buy this stock at a discount.
Twilio began to fall in February amid a sell-off in the overall tech sector. Though it appeared to stage a comeback from its May lows, the second-quarter earnings report led to another setback despite a massive revenue surge. Revenue of just over $1.25 billion for the first six months of 2021 increased 64% compared to the prior-year period.
Still, losses for the first half of 2021 came in at $434 million, compared to a $195 million loss in the same period last year. Moreover, Q3 guidance pointed to a non-GAAP loss from operations of between $25 million and $30 million, a disappointment considering Twilio reported positive non-GAAP income from operations in the third quarter of 2020.
Nonetheless, the market may have overreacted. Indeed, Twilio faces competition in the CPaaS market. However, switching from such a platform is highly disruptive to a business, making a switch to a competitor less likely. Moreover, Twilio has expanded its moat through Twilio Flex. It gives clients a programmable cloud contact center, allowing them to deploy wherever and whenever needed. This is far easier than before when clients had to build such a system from scratch. Management described Flex as one of the fastest-growing SaaS products on the market on the Q2 2021 earnings call.
Customer counts grew to about 240,000 in the second quarter, up from around 200,000 in the year-ago period. And despite ongoing losses, the $670 million to $680 million in revenue the company forecast for Q3 would represent a revenue increase of at least 50% year over year.
Moreover, Twilio has risen more than 240% since the beginning of 2020, and its price-to-sales ratio of 24 is well below the peak sales multiple of 36 in early February. Given the projected massive increase in revenue, Twilio's long-term growth story is not likely to end anytime soon.
Image source: Getty images.
Roku: A buying opportunity
Danny Vena (Roku): There's little question that Cathie Wood is a big fan of Roku. The streaming video specialist is the No. 3 holding of the ARK Innovation ETF, which focuses on disruptive technology, and the No. 10 holding of the ARK Next Generation Internet ETF (ARKW -0.05%), which focuses on businesses set to benefit from our cloud-based future. Together, the two funds hold more than 3.8 million shares of Roku stock worth over $1.3 billion.
Roku shares have declined roughly 27% since topping all-time highs less than a month ago. What's causing the sell-off? When the company released its second-quarter earnings report earlier this month, a couple of metrics gave investors pause.
By most measures, Roku delivered a blockbuster quarter. Total net revenue of $645 million grew 81% year over year, led by platform revenue that surged 117%. This resulted in earnings per share (EPS) of $0.55, reversing a loss of $0.35 per share in the prior-year quarter. Both figures crushed analysts' consensus estimates, which were calling for revenue of $619 million and EPS of $0.11.
Roku's customer metrics were equally robust. Active accounts jumped above 55 million, gaining 28%, while the average revenue per user (ARPU) of $36.46 grew 46%. It's worth noting that the growth rate of active accounts has decelerated in each of the past three quarters as pandemic-related restrictions have loosened.
The one metric that seemed to spook investors most was Roku's streaming hours, which clocked in at 17.4 billion hours, up 19% year over year, but declining about 5% sequentially. This marked the slowest rate of growth since Roku went public in mid-2017. The company also warned that supply chain constraints could eat into player gross margin, though Roku sells its devices near cost.
It isn't surprising that viewers spent less time streaming. The economy has begun to open in earnest after months of restrictions, with families visiting restaurants and theme parks, taking vacations, and getting outdoors after spending much of the past year avoiding public places and trying not to congregate with others.
Looking ahead, management is forecasting third-quarter revenue of about $680 million, which would represent roughly 51% growth at the midpoint of its guidance. That's pretty robust growth in the absence of pandemic-fueled tailwinds.
This current decline has all the markings of short-term thinking and investors with a sufficient time horizon will likely look back on this years from now and see this as a compelling buying opportunity.
Image source: Zoom.
Zoom: More than just a coronavirus play
Brian Withers (Zoom Video Communications): Zoom video calls are a daily ritual for millions of remote employees around the globe. But despite the software specialist's torrid growth, investors have seemingly abandoned the stock: Shares have dropped more than 40% since October. But Cathie Wood and her team at ARK Invest have been buying steadily since then. The ARK funds have added more than 3 million shares of Zoom to the fund's positions over the last 10 months. Let's take a look at why tech-focused investors with a long-term outlook might want to add some shares today.
If you just looked at how much this stock is off its high, you might conclude that the business is struggling, but that's not the case at all. Its operational metrics are in much better shape than it was when the stock hit its highs. Over the past year, not only is revenue up an astounding 191%, Zoom has improved gross margin from 68% to 72%, and its net income is up eightfold over that same time period. Cash flow from operating activities has doubled, and as of last quarter, Zoom had an enviable $4.6 billion in cash and marketable securities.
Even though Zoom's metrics are solid looking backward, some investors may be worried about pandemic tailwinds winding down. The company isn't resting on past successes and has a number of irons in the fire to spur growth. Just a little over a month ago, the videoconferencing specialist announced its acquisition of Five9. This will allow Zoom to enter the growing contact-center-as-a–service space and open up cross-selling opportunities. Also in July, the company announced Zoom Apps (Zapps) and Zoom Events. Zapps allow third-party developers to create specialized add-ons to enhance the video experience. Zoom Events tailor the superior video experience to enable users to run online conferences or webinars. These features should create additional use cases for Zoom and its customers.
Lastly, with the stock pullback and the improving operational metrics, its valuation has decreased considerably. In October, the price-to-sales ratio was a nosebleed 120-plus, and it has since cooled off to a more reasonable 31 today. With a solid double-digit P/S ratio, the expectations for this video platform are still high, but over a three- to five-year holding period, a buy today should pay off with market-beating results.
