Famed innovation investor Cathie Wood's flagship ARK Innovation ETF had a 2021 to forget, down 22% over the past year, while the Nasdaq has galloped 61% higher. Many of her favorite stock picks have busted, and investors might be questioning whether she's lost her touch.
Fear not; success in the stock market rarely moves in a straight line. I've identified three Cathie Wood favorites that have had rough years but are poised to snap back into winning form in 2022.
1. Teladoc
ARK's bet on telehealth company Teladoc Health (TDOC 0.08%) has been one of its largest ideas in 2021. The stock has fallen a whopping 70% from its highs earlier this year, yet Teladoc still represents approximately 5.8% of the market value in ARK's Innovation ETF, the fund's third-highest weighting.
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Teladoc's revenue growth rapidly picked up during the height of lockdowns when people were less willing or able to go to a physical doctor's office. Revenue growth soared to a triple-figure pace, so it's only natural that growth would revert lower again as lockdowns ended; it's hard to maintain triple-digit growth! But the market has sold the stock off anyway, potentially thinking that the business was reliant on COVID for its growth.
Ironically, the stock has sold off so much that it's now cheaper than before COVID, with a price-to-sales ratio of just over seven. Meanwhile, management has guided for 25% to 30% revenue growth per year through 2024, meaning that the company will build on its COVID-driven growth instead of giving it back.
In other words, the growth Teladoc saw during the pandemic is here to stay, and the company will add to it in the years to come. With a compressed valuation, investors could see the stock begin to reflect the expected growth over the next several years.
2. Roku
Streaming is another big idea at ARK, and smartTV and ad-tech platform Roku (ROKU -0.40%) is arguably the king of the streaming world. The stock is down more than 50% from its highs and carries the second-highest weighting in ARK's Innovation ETF at just over 6%.
Roku's had a similar problem to Teladoc; it saw growth accelerate during lockdowns, and investor sentiment is turning on Roku now that growth is slowing in the face of the higher 2020 figures it's had to follow. Its most recent quarter, 2021's third quarter, saw 23% account growth year over year, one of its lowest-growth quarters in years.
ROKU Revenue (Quarterly YoY Growth) data by YCharts
The stock's valuation has come back down to "normal" after the sell-off, yet the business seems strong moving forward. User growth may slow some, but Roku is in the early stages of its international expansion, so there is still a long runway to pick up new users.
Meanwhile, average revenue per user (ARPU) grew 49% year over year in 2021 Q3, showing that Roku's momentum in making money from its user base remains strong. Investors could see continued organic growth begin to drive the share price once again, now that the froth in the stock's valuation has burned off.
3. Coinbase
Cryptocurrency remains a new and exciting industry for investors. ARK has been adding shares of cryptocurrency technology company Coinbase Global (COIN -2.31%) to the ARK Innovation ETF since the company's IPO earlier this year. The stock is the fifth-highest weighting in the fund, at roughly 5%.
The stock is down about 40% since hitting highs a couple of months ago, and the company's rapid growth has pushed the stock's P/S ratio down throughout the year. Coinbase generated $1.2 billion in net revenue in 2021 Q3, a more than fourfold increase year over year.
Cryptocurrencies can be volatile at times, and Coinbase's core business is its exchange, where it gets revenue from cryptocurrency trades on its platform. The mystery surrounding cryptocurrency and its long-term outlook could make investors a little uncertain of Coinbase, which might explain some of the sell-off the stock has seen, despite its growth.
But a compressing valuation leaves more room for upside as Coinbase continues to grow. If cryptocurrency adoption continues, Coinbase will be one of the best stocks for exposure to the sector's growth. Meanwhile, non-fungible tokens (NFTs) are rising in popularity, and Coinbase's looming NFT marketplace could be a catalyst that helps push the stock upward in 2022.
