Some investors have been questioning the wisdom of ARK Invest head Cathie Wood lately. The top investor made headlines in 2020 when her Exchange-traded funds (ETFs) outdid the broader market, and individual investors have turned her into an investing guru, watching her movements to see where the next great investment could be found. But her ARK's ETFs haven't performed quite as well in 2021. ARK Innovation (ARKK -0.77%) is down 15% year to date, for example, and ARK Fintech Innovation (ARKF -0.74%) is down 6% year to date, even as the S&P 500 has gained 24%.
Cathie Wood has responded to naysayers by explaining the disruptive tech stocks are in deep value territory, and the worst mistake for shareholders right now is to sell. "Perhaps influenced by negative headlines in the media and by the inherent volatility of our strategy, some clients have sold near the bottoms of market cycles," she said, "turning what otherwise would have been temporary losses into permanent losses." Instead, during these kinds of corrections, she's concentrating her holdings on her highest-conviction stocks. Two of her recent buys were Block (SQ -1.78%), formerly Square, and Shopify (SHOP -2.25%), and in the long term, they could make you rich.
1. Block: down 23% this year
Block recently got a name change from Square based on management's belief that the company's mission encompasses a lot more than its seller business, from which it got its original name based on its little white square card reader. Block's efforts have been expanded to its Cash App business, which itself has expanded to include cryptocurrency trading, and its own cryptocurrency growth endeavors, which it now calls Spiral. The name Block is meant to include all of these diverse areas as building blocks, and significantly, the blockchain technology that underlies much of cryptocurrency.
Block stock has been a huge winner in the past, gaining more than 1,000% over the past five years. Investors soured on it in 2021 based on a mixed pandemic performance, where the sellers business tanked due to small business closures, and cryptocurrency accounted for an outsized portion of the company's growth. Recently, the seller business has bounced back, but cryptocurrency sales have pulled growth down due to volatility in that arena. In other words, now that there's a mixed business, it's a mixed bag.
Block still has tremendous growth opportunities, and Cathie Wood has been prescient before. Cryptocurrency may be volatile right now, but it's gaining in importance as more companies, such as Block, buy-in and allow traders to get in on it, too. CEO Jack Dorsey is specifically enamored with Bitcoin, which has achieved widespread acceptance as a real and usable currency. Aside from its investments in Bitcoin, Block has added many functions to its Cash App that make it an all-in-one personal financial app. These include banking and stock trading, on top of its classic peer-to-peer payments features, and it recently lowered its age requirements to target a teen demographic.
It's not surprising that business is fluctuating while operations are changing, and it's equally unsurprising that the stock price is following suit. The question is, where will Block land when all of its parts come together? Cathie Wood sees the potential here, which makes sense, considering that she is also a fan of cryptocurrency. If she's right about Block, the stock will rebound and continue to post gains for investors over time.
Shopify: up 22% this year
Shopify has been one of ARK's winners this year, and it's easy to see why. Online businesses took off during the pandemic in an unprecedented way, and it's not letting up. This puts Shopify in a prime position to exercise its full potential.
Shopify markets pre-fab but customizable web solutions for small and medium-sized businesses, and as it's grown, it's expanded its services to target larger businesses as well. That gives it new ways to grow as even large businesses see its easy-to-use features as a compelling addition to their operations. They can save money by outsourcing web and payment solutions instead of hiring in-house professionals, a win-win all around.
The company calls its addressable market "Anyone who wants to make more money from their site than they pay for it," and it calculates that as $153 billion in small businesses. Trailing 12-month revenue of $4 billion is only a drop in that huge bucket.
Shopify frequently upgrades its platform by forming partnerships with other e-commerce builders and fintech companies, such as its deal with buy now, pay later company Affirm Holdings, and integration with cross-border payment specialist Global-e. These are some examples of the nearly 4,000 easily integrated apps available for Shopify's sites. Management sees plenty of growth opportunities in the future, with a flywheel effect coming from new merchants, new partners, and higher gross merchandise volume.
Shopify has been an outstanding stock to own, gaining more than 3,000% over the past five years, and Cathie Wood doesn't see it stopping any time soon.