ARK Invest and Chief Executive Officer Cathie Wood have had a rough year. The company's ARK Innovation (ARKK -0.26%) exchange-traded fund (ETF) skyrocketed in 2021, peaking in February. Since then, however, this ETF has crashed, and it is now down about 64% from those all-time highs. Additionally, the ETF is just 20% above its price three years ago.
But Cathie Wood is a visionary investor, and she has simply fallen victim to market volatility that has rocked nearly all tech stocks. Wood is still investing for the long term, however, and her funds have been aggressively buying some of their favorite companies at major discounts.
These two companies in particular are leaders in their respective industries, and while short-term headwinds might slow growth in the coming year, the next decade looks very bright for both. Wood has been loading up on Coinbase Global (COIN 2.01%) and Roku (ROKU 1.91%), and you might want to follow suit.
Image source: Getty Images.
1. Coinbase
Coinbase's growth over the past year has been unbelievable. In the fourth quarter of 2021, its top line skyrocketed more than 400% year over year to $2.5 billion. The total crypto market capitalization grew nearly threefold from the end of 2020 to 2021, and with Coinbase being one of the most prominent trading platforms in the industry with 89 million verified users, it has been a major beneficiary of this growth.
This hypergrowth is not expected to continue forever, and the company might face a rough patch in the coming year. Management believes transaction revenue per user will fall to pre-2021 levels, which ranged from $34 to $55, a steep decline from 2021's revenue per user of $64.
There are also long-term risks associated with Coinbase. The vast majority of revenue comes from transaction fees, the small percentage it takes off the top of every purchase on its platform. Those take rates can vary depending on the amount being transacted, but there is concern about the longevity of those fees. Many investors and consumers see a future where crypto trading platforms get rid of fees (which is what happened in stock trading), and that could crush Coinbase's revenue if it cannot get ahead of the curve.
But Coinbase is getting ahead of the curve. It has invested heavily in new products that diversify its revenue away from transaction fees. The company began testing a subscription service that offers 24/7 customer support and fee-free crypto trading. Additionally, it is looking to build a trading platform for non-fungible tokens (NFTs), and offer users the ability to develop their own decentralized applications. These endeavors are still in the early stages with little or no revenue, but they signal that Coinbase is skating to where the puck is going.
It generated more than $10.7 billion in free cash flow in 2021 to supplement these growth initiatives. Most of that cash flow came from accounts being funded, but even after excluding that, its cash flow stood tall at $4 billion. The company is trading at only about 11 times earnings, which might be why ARK bought more than 225,000 shares between Feb. 22 and 28 this year. With strong growth, cash flow, and investments in its future, Coinbase seems like a steal today despite its risks.
2. Roku
Roku is in a similar situation, albeit a harsher one for investors looking at the short term. The shares are down about 80% from their all-time highs and now trade at just 5.3 times sales. The streaming platform, which now has more than 60 million active accounts, is expected to increase its revenue by just 35% year over year in 2022 due to supply chain constraints in the production of TVs, which can hamper its growth. If TVs aren't being shipped out, Roku can't increase its account base, advertising revenue, or hardware revenue.
Until these supply chain issues are sorted out, Roku might see weak growth, but the long-term future looks strong. The company is one of the leading platforms for users, with 19.5 billion hours streamed on its platform in the fourth quarter.
And its new Roku Channel is gaining in popularity, reaching an estimated 80 million people in the fourth quarter as its streaming hours doubled year over year in 2021. This channel allows Roku to take 100% of advertising revenue, as compared to splitting it with streaming partners, making this a very lucrative endeavor.
This industry leader has many tailwinds over the long term, and Wood agrees. ARK has bought about 897,000 shares since Feb. 18, 2021. With such a low price, you might want to consider this bargain-bin stock, too.
