After her ARK Innovation ETF (ARKK -0.26%) soared 242% from April 2020 through January 2021, Cathie Wood's exchange traded fund (ETF) has crumbled. Year to date, the ETF has plunged almost 60%, and many of the star stock picker's favorite companies continue to tumble in the wake of rocketing inflation and rising interest rates. Generally speaking, Cathie Wood prefers high-growth companies with innovative business models. Many of these companies, however, are not yet profitable and trade at lofty valuation levels.
Wood's goal is to invest in businesses that will eventually generate a surplus of profits and cash flow, providing outstanding capital gains along the way. Many of her investments are struggling at the moment due to the uncertain economic environment, which has triggered a shift from speculative growth companies to safer assets like bonds and value stocks. That said, the growth investor's portfolio is not all tied up in unprofitable businesses.
In fact, two of her top holdings are highly profitable companies that have the potential to generate monstrous returns in the long run. And, fortunately for bargain hunters, both stocks are down significantly year to date. Let's dive in and examine why investors should consider buying shares of these two companies.
Image source: Getty Images.
1. Zoom Video Communications
Zoom Video Communications (ZM 1.46%) faces short-term headwinds from the macroeconomic backdrop and the reopening economy, but the company's business prospects remain rock-solid over the long run. Now is looking like a great time to buy shares of the video-conferencing juggernaut, down 38% year to date and 70% in the past year.
In the first quarter of its fiscal 2023 year, the company generated $1.1 billion in sales, indicating 12.3% growth year over year. Its adjusted earnings per share (EPS) of $1.03 beat Wall Street estimates by nearly 18%. Its generally accepted accounting principles (GAAP) gross margin climbed 330 basis points to 75.6%, but its operating margin dropped 630 basis points to 17.4%. The company's customer base, which contributes more than $100,000 in trailing-12-month revenue, grew 45.9% to 2,916, showcasing Zoom's ability to expand its clientele despite the reopening of the global economy.
For the full fiscal year (which will end in late January 2023), Wall Street analysts expect total revenue to rise a modest 10.5% year over year to $4.5 billion, and adjusted EPS to retreat 26.8% to $3.7. Next year, which is when comparable metrics will normalize, analysts are forecasting the company's top- and bottom-lines to grow 13.4% and 8.4%, respectively. So, while growth is projected to unwind from previous levels, Zoom's business has already proven to be extremely profitable.
What's more, the company already reigns over almost half of the global video-conferencing market, holding 48.7% while second place contender Google Meet trails significantly behind at 21.8% market share. Even better for investors who are itching for a sale: Zoom is trading at its lowest valuation since going public. At its existing price levels, I believe investors are granted a strong margin of safety.
2. Tesla
Shares of the electric vehicle (EV) giant, Tesla (TSLA -3.55%), have pulled back 41% since the start of 2022. Despite its recent stock performance, however, the company's business is in fantastic shape. In its opening quarter of 2022, total revenues surged 81% year over year to $18.8 billion, and adjusted EPS rocketed 246% to $3.22. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin also expanded 906 basis points to 26.8%, indicating that Tesla's business is becoming increasingly profitable.
In spite of supply chain bottlenecks and factory shutdowns, both production and deliveries overachieved, growing 69% and 68% year over year, respectively. These are excellent growth rates, but that's not all. The EV leader generated $2.2 billion in free cash flow (FCF) during the quarter as well, translating to a whopping 660% rise from a year ago.
The company will likely have to cope with an assortment of macroeconomic and company-related headwinds in the near term, but it has proven time and time again that its business is built to last. For the full fiscal year, analysts project Tesla's top- and bottom-lines to ascend 59% and 78% year over year, up to $85.6 billion and $12.11, respectively. This superb growth, combined with its weakening valuation, makes Tesla a very intriguing buy at the moment.
