Ark Invest CEO Cathie Wood became a sensation during the pandemic. In 2020, the Ark Innovation ETF skyrocketed 149%, fueled by its exposure to growth stocks across a range of trendy industries, from e-commerce and communications software to telemedicine and electric vehicles. Despite falling 68% from its high, the Ark Innovation ETF has still outperformed the broader S&P 500 since its inception in 2014.
Tesla (TSLA -0.64%) and Zoom Video Communications (ZM 0.13%) currently comprise more than 12% of Ark's portfolio across all of its ETFs, implying high conviction in both companies. Should those stocks be part of your portfolio?
1. Tesla
Not too long ago, the juggernauts of the auto industry paid little attention to Tesla, and they certainly didn't see the company as a threat. A former Daimler chairman even said Tesla was a joke when compared to the great car companies of Germany. But the narrative has changed dramatically in recent years. Case in point: Tesla once again led the electric car industry in sales during the first quarter, capturing over 15% market share.
The future of the auto industry is undoubtedly electric, and Tesla was built from the ground up to make electric cars. To that end, while legacy automakers like Ford Motor Company and General Motors are investing billions of dollars just to catch up, Tesla is fine-tuning its manufacturing efficiency and investing aggressively in full self-driving (FSD) and battery cell technology.
Tesla has delivered a stunning financial performance over the past year. Revenue soared 73% to $62.1 billion, operating margin rose to an industry-leading 15.5%, and free cash flow skyrocketed 188% to $6.9 billion. Those results are particularly impressive in light of the inflationary environment, chip shortages, and supply chain disruptions that challenged the broader auto industry.
Shareholders have plenty of reasons to be excited. Tesla is currently ramping up production at new factories in Texas and Germany, the latter of which will reduce logistics costs by localizing its European business. The company also has several new vehicles scheduled for production in the next few years, including the Cybertruck and Semi in 2023, and a dedicated robotaxi in 2024.
However, CEO Elon Musk sees FSD technology as the long-term profit engine for the car business. Eventually, Tesla plans to launch an autonomous ride-hailing platform, entering a market that Ark Invest says could generate $2 trillion in profits annually by 2030. Musk also believes that Optimus -- the humanoid autonomous robot debuted during Tesla's most recent AI Day event -- will eventually be bigger than the car business.
In many respects, Tesla trades at an outrageous valuation, though its price/earnings-to-growth (PEG) ratio is currently lower than that of the broader Dow Jones Industrial Average. Regardless, the company is an innovation powerhouse that could reshape several industries. If you can handle a bumpy ride and you're prepared to hold for the long term, I think it's worth buying a few shares of this growth stock.
2. Zoom Video Communications
Zoom is disrupting the corporate communications market. Its cloud platform unifies video, phone, chat, and event management solutions, and the company recently added contact center and conversational intelligence services to its portfolio. Zoom also provides a suite of developer tools that allow clients to integrate its technology into third-party applications.
Its wildly popular videoconferencing app, Zoom Meetings, saw rapid adoption during the pandemic, and it still ranks as the leading videoconferencing software on the market, according to the latest G2 Grid report. But Zoom Phone -- a cloud phone system that simplifies remote work for employees and enables remote management for IT teams -- is also catching fire with customers. The company hit 3 million seats sold in the last quarter, up threefold from 1 million in early 2021.
Financially, Zoom is growing at a steady clip. In the past year, its enterprise customer count climbed 26% to 198,900, and the average customer spent 23% more. As a result, revenue jumped 29% to $4.2 billion and earnings under generally accepted accounting principles (GAAP) soared 42% to $4.12 per diluted share.
Zoom's leadership in the videoconferencing space should help it capitalize on the increasing popularity of remote and hybrid work. On that note, management values its market opportunity at $91 billion by 2025. And with shares trading at 8.2 times sales -- a bargain compared to their three-year average of 41.3 times sales -- now is a good time to buy this growth stock.
