Cathie Wood was one of the hottest names on Wall Street throughout 2020 and much of 2021, thriving with her innovation-focused and high-growth approach to investing. However, the decline of growth and technology stocks over the past year has hit her funds just as hard.
The ARK Innovation ETF has now retreated to near its pre-COVID levels, wiping away most of the gains seen over the past two years. Despite the negative price action of the fund, there are stocks within it that have strong shots at outperforming the overall market moving forward. Here are three of those stocks to consider for your growth portfolio.
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1. A metaverse platform
Roblox (RBLX 1.35%) is a digital platform where users (typically 18 and under) can participate in games and experiences. It's an early example of the metaverse, where the online and physical worlds interact. The Roblox platform currently has 49.5 million daily active users.
The company's growth picked up during the height of the pandemic when people were at home more often and had more time to spend gaming. The company's revenue growth peaked at 140% year over year in the first quarter of 2021, and it has slowed in every quarter since then.
Revenue was still up 83% in the fourth quarter. However, bookings, which are sales on the platform that haven't yet been recognized as revenue (and which serve as a signal for how revenue growth is trending), grew just 20% year over year. This implies Roblox's revenue growth is quickly slowing.
The stock price has fallen to reflect this development with shares down roughly 50% since the beginning of the year. COVID-19 likely "pulled forward" growth from future quarters, but the long-term story of Roblox looks bright. The stock's decline could be an opportunity for patient investors who believe that growth will rebound over time.
2. A SaaS stock bargain
Twilio (TWLO 1.47%) is a software platform that lets companies build custom applications to engage their customers. Have you ever visited a website and seen a little chat box pop up in the corner of the page? Twilio probably powers that feature. The business model is software as a service (SaaS), generating recurring revenue like a high-tech "utility" for investors.
The company has expanded at a steady rate -- revenue growth has averaged 59% annually since 2016. The top line was up 61% in 2021 to $2.8 billion, showing the business has maintained its trajectory despite having to grow from a larger base each year.
Twilio's customers tend to increase their spending with the company over time, and the business boasts an impressive net revenue retention rate (NRR) of 130%. Existing customers are also helping to drive Twilio's growth.
The stock, however, has been swept up in the broad-market tech and growth correction. Its price-to-sales ratio has fallen to just under 10, close to its lowest level since going public in 2016. If the company can keep up its track record of growing revenue between 40% and 60% per year, the stock's compressed valuation should set investors up for great long-term returns.
3. The king of audio content
Spotify Technologies (SPOT 0.20%) is one of the leading audio platforms with roughly 406 million monthly active users (MAU) worldwide. Users can listen to millions of songs from virtually any artist as well as podcasts. Some famous figures, such as Joe Rogan, have exclusive deals with Spotify.
The company generates revenue from premium subscriptions and running ads to non-premium members. Spotify's 2021 revenue grew 23% year over year to 9.6 billion euros, an uptick after growing 16% in 2020.
The stock has succumbed to the market's sell-off despite this growth -- shares are down roughly 50% over the past year. The stock's P/S ratio has rebounded slightly to 2.5 after hitting an all-time low earlier this month. However, the company isn't profitable yet with a net loss of 34 million euros in 2021.
Spotify is free-cash-flow positive, though, generating 104 million euros in the fourth quarter, and it has roughly 3.6 billion euros in cash and short-term investments. Hence, the company has a ton of funding available for future growth efforts. Investors will enjoy strong long-term returns if Spotify can turn profitable over the coming quarters.
