Although the once white-hot returns of investing guru Cathie Wood's Ark Investment exchange-traded funds have cooled off considerably in 2021, she remains a fairly sharp prognosticator.
That's why it's still worth investors' time to watch which stocks she's adding to her ETFs' portfolios. At various times, she has picked up Sea Limited (SE 4.21%), Unity Software (U 4.49%), and Tesla (TSLA 4.58%) -- and according to three of our Motley Fool contributors, you might want to follow her lead and buy those stocks yourself right now.
A potentially huge wave that's yet to crest
Eric Volkman (Sea Limited): Budding tech conglomerate Sea Limited is well-positioned to be a powerhouse, as it has not one, not two, but a trio of fast-growing business segments.
Each of the three is in a red-hot area of the tech sector. The Singapore-based company's digital entertainment wing, Garena, is anchored by the video game Free Fire -- a monster hit in Asia. In the second quarter, active players of its titles grew by 45% year over year to a massive 725 million souls, and more people are paying for in-game goodies to give themselves a competitive edge -- the number of quarterly paying users advanced at an even faster 85% pace to over 92 million.
Where users go, the money follows. Sea's total revenue for digital entertainment was just under $1 billion in Q2 alone, a mighty 167% higher than in the same quarter last year. That was on the back of total bookings that rose by 65% to $1.2 billion.
Sea also has Shopee, a thriving e-commerce operation. On the back of the Shopee app, which the company says is the No. 1 retail app in Southeast Asia, revenue is pouring in for this business. It drew $1.2 billion during the quarter, up a whopping 161% year over year, with gross merchandise value clocking in 88% higher at $15 billion.
Both business segments should continue to do gangbusters business. When it delivered its Q2 report, the company raised its full-year guidance for both segments; it's anticipating 44% growth over 2020 for digital entertainment, and nearly 122% for e-commerce.
At the moment, the third leg of the business, a digital financial services arm SeaMoney, is a relative blip in terms of standalone revenue. However, the company said the unit's total payment volume in Q2 was over $4.1 billion, a nearly 150% year-over-year rise. We can imagine that number will grow considerably given how SeaMoney is integrated with Garena and Shopee.
Sea isn't yet profitable. In fact, its net loss deepened in Q2 to more than $433 million. However, like many of the best tech companies did at similar life stages, it's spending money to make money -- basically sacrificing near-term profitability for longer-term growth. Since its growth rates are robust and highly impressive, this feels like a smart strategy that will pay off in the coming years.
Capitalize on this massive digital media trend
Keith Noonan (Unity Software): Video games stand above pretty much every other entertainment medium when it comes to engagement. In an era where the "attention economy" has never been more important, and keeping audiences captivated opens up cross-platform opportunities and synergies, it's no stretch to say that the future of entertainment is interactive.
Unity Software is best known as a company that provides a development engine for building video games. In addition to its core engine, Unity also provides pre-made assets that developers can plug into their creations. The company's software can also be used to create experiences outside of the traditional gaming space.
There's a good chance that tech trends including augmented reality (AR) and virtual reality (VR) will make digital browsing and shopping more interactive and game-like, and Unity will pave the way. Let's say a clothing company wants to launch a shopping experience tailored for an AR or VR interface. They could spend the time and money building their software from the ground up and wind up with highly customized code. Or, they could take what would likely be a much more cost-effective route and opt to use Unity's flexible engine and assets.
Opting for existing development engines or platforms will be an easy choice for most businesses looking to create digital experiences, and Cathie Wood is betting big on the future of Unity. The software company currently stands as the fourth-largest stock holding across her ARK Invest funds, and the business is showing impressive momentum. Revenue surged by 48% year over year last quarter, and investors can look forward to more big growth.
With the company sporting a market capitalization of roughly $41 billion and valued at approximately 39 times this year's expected earnings, the market has already priced in some strong performance, but the stock could go on to be a big winner for patient investors. Unity Software stands out as a great pick-and-shovel play for benefiting from the ongoing growth of interactive content and experiences.
Winners tend to win, so let them run
Rich Duprey (Tesla): When Cathie Wood unloaded $600 million worth of Tesla stock last month, she violated the No. 1 investing principle of Motley Fool co-founder David Gardner: Let your winners run. High.
Perhaps because the electric car maker is still Ark Invest's largest holding, representing 7% of its combined ETF portfolios, she might have decided to take some of the profits she earned from that position and use them to bolster her stakes in underperforming stocks like Coinbase and Robinhood. That was probably a mistake.
She took money from a winning play to dump it into laggards. That violates Gardner's No. 2 rule, which is to add to your winners, not your losers. And Tesla is definitely winning.
It is, of course, the biggest-selling EV maker in the U.S. with 241,000 deliveries in the third quarter, though it says that's a conservative figure because a vehicle is only counted by that metric if it has been transferred to the customer and all the paperwork is correct.
With the automotive market in the midst of an EV revolution and Tesla positioned at its head, there's a reason one Wall Street analyst still has a $1,200 price target on its stock, which is currently changing hands in the neighborhood of $866. Sure, some don't think it's worth nearly that much -- the low end of the range is $137, and the average price target is $627.13 -- but the opportunity for Tesla to see sustained demand for its vehicles and to be able to meet it, particularly with the new factory it recently completed in Berlin, is high.
Major legacy automakers are ramping up their own production of electric models, and some, such as General Motors, are making claims that 100% of their fleets will be all-electric by the mid-2030s, but none are close to matching Tesla at the moment. Ford was the second-biggest EV seller in the third quarter, but that was by dint of its having sold almost 19,000 Mustang Mach-Es. It's still far behind Tesla.
Still, Wood is sitting on some nice returns from her investments in Tesla, with various tranches ranging in price from $256 per share to $326 per share. Considering where the EV leader trades now, she's made some decent profits, but there's likely more where that came from, even for investors buying in today.
Although Tesla's stock doesn't look cheap, its preeminent position makes it worth the premium.