Cathie Wood went looking for discounts last week. The co-founder and CEO of ARK Investment Management, known for her bold calls on technology stocks, went searching through the bargain bin of beaten-down stocks last week and came away with some real winners.
So what did she buy? Wood's exchange-traded funds (ETFs) added to existing stakes in Twilio (TWLO +2.30%), Roku (ROKU +3.84%), and Nvidia (NVDA +1.67%). Let's see if we can figure out what she sees in these former high-flyers that are currently being passed over by so many investors.
Twilio
Twilio could well be one of the most successful companies you've never heard of -- but it's almost certain you've interacted with its groundbreaking platform, which integrates communication software with mobile apps. The text prompts that help you update an expired or lost password? The in-app chats with customer service? Real-time updates regarding the status of ride-share or food delivery? Chances are many of those communications were facilitated by Twilio's technology.
Given that Twilio's stock price is down 79% from its recent high, you might think that its growth is over, but nothing could be further from the truth. Even in the face of the recent macroeconomic headwinds, its second-quarter revenue grew 41% year over year, or 33% if you take out the impact of last year's acquisition. Twilio's losses continued as the company invested heavily to grab market share at this early stage of its growth. That said, Twilio has recently taken steps to improve its profit outlook, much to the delight of shareholders and analysts alike.
NYSE: TWLO
Key Data Points
At the same time, the company's active accounts grew 15% year over year and existing customers continued to increase spending, as evidenced by its dollar-based net expansion rate of 123%.
Twilio has established itself as the leader in the communications-platform-as-a-service (CPaaS) market, according IDC MarketScape, while also receiving high marks on Gartner's Peer Insights Report. Furthermore, the CPaaS market is expected to grow from $5.3 billion in 2022 to more than $59.3 billion by 2032, a compound annual growth rate (CAGR) of 25%. Twilio is well positioned to benefit from this accelerating trend.
The digital transformation is ongoing. More businesses than ever before are relying on apps to interact with their customers, and the need to communicate in real-time will only grow from here. That gave Wood plenty of incentive to add to ARK's Twilio position.
Roku
Streaming video growth has certainly hit the skids in recent months. After months of being cooped up, people have made it a point to get off of their couches and get back to living, as the pandemic had sidelined many activities. However, the potential for a protracted recession could soon turn the tide, as viewers huddle at home to wait out the worst of the economic uncertainty.
Furthermore, in an all-too-familiar refrain, cord-cutting continues, as cable TV has lost nearly 3.9 million subscribers so far in 2022. Many of those viewers are turning to streaming for their home entertainment needs, suggesting its growth has merely hit a speed bump.
NASDAQ: ROKU
Key Data Points
Roku stock has stumbled, declining 78% from its recent high as investors wondered how long its growth slump would continue, but they might be missing the forest for the trees. Revenue grew -- albeit more slowly -- up 18% year over year, but that only tells half the story. Player revenue declined 19% year over year, the result of supply chain constraints, while platform revenue grew 26%.
At the same time, streaming hours and active accounts grew 19% and 14%, respectively, continuing Roku's uninterrupted growth streak. Perhaps more importantly, the average revenue per user (ARPU) grew 21%, proving that Roku is able to squeeze more revenue from each successive viewer -- an important consideration once more robust growth resumes.
Businesses will inevitably experience peaks and valleys in their growth, which oftentimes coincide with the general economic climate. As the industry leading streaming aggregator, Roku is at the intersection of two powerful trends -- cord-cutting and streaming video adoption -- which should fuel its growth for years to come. That's likely why Wood has been consistently adding to an already sizable position.
Nvidia
Another stock that's been mauled by the bear market is Nvidia. An unexpected slump in gaming revenue spooked investors, sending the semiconductor specialist skidding, with its stock currently down 39% compared to last year's high. But a quick look at its results show the company isn't a one-trick pony.
In its fiscal 2023 second quarter (ended July 31), revenue grew 3% year over year, fueled by a 61% increase in data center revenue, even as gaming revenue slumped 33%. Nvidia cited macroeconomic headwinds for the sudden -- albeit temporary -- slowdown in consumer demand for graphics processing units (GPUs).
NASDAQ: NVDA
Key Data Points
But stepping back shows that Nvidia is the undisputed leader in the discrete desktop GPU market, with an 80% share, even gaining additional share against the competition in the second quarter. It's also one of the biggest providers of processors used in data centers, cloud computing, and artificial intelligence. This suggests that once the macroeconomic headwinds abate, Nvidia's historically strong growth will resume.
Last year, Nvidia's revenue grew 61% year over year to a record-setting $26.9 billion, but that could be just the beginning. Management estimates that the company's total addressable market tops out at a massive $1 trillion, giving the company plenty of room for future growth. This combination of factors probably peaked Woods' interest in adding to her position.
Grabbing bargains while she can
It's worth noting that each of these technology stocks is already on Cathie Woods' list of favorite stocks. In the ARK Innovation ETF, Roku, Twilio, and Nvidia are already among the fund's largest holdings, ranked No. 3, No. 12, and No. 22, respectively.
This suggests that Wood has already done her homework on these stocks and is simply buying more at a discount, though some are cheaper than others. Nvidia is currently trading at 10 times next years sales, and while that isn't exactly cheap, it is on the low end of the stock's historical valuation. Roku and Twilio, meanwhile, are each selling at a price-to-sales of less than 3, putting them closer to screaming-bargain territory.
