In 2022, investors grappled with the deepest bear market since the global financial crisis in 2008, and the technology sector took the brunt of the pessimism. As inflation and interest rates climbed, investors trimmed their expectations for the high-growth tech companies that had done so well in 2020 and 2021, sending many individual stocks down 50% or more.
Cathie Wood's Ark Invest is focused on the technology sector, so it experienced a steep decline in the value of its exchange-traded funds (ETFs). Its flagship Ark Innovation ETF fell a whopping 66% for 2022.
While the Nasdaq-100 benchmark tech index remains in a bear market, things are looking up for 2023. It has jumped 9% in January so far, and a panel of Motley Fool contributors think three of Cathie Wood's favorite stocks could soar if that trend continues. Here's why they believe investors should consider buying Tesla (TSLA +2.90%), Shopify (SHOP 5.53%), and Roku (ROKU 0.72%) hand over fist.
NASDAQ: TSLA
Key Data Points
This Cathie Wood favorite might be set to recharge
Anthony Di Pizio (Tesla): Cathie Wood and Ark have routinely been among the most vocal bulls on Wall Street when it comes to Tesla, the world leader in electric vehicles (EVs). It remains the second-largest holding across all of Ark's ETFs, emphasizing the firm's belief in the company despite a 61% drop in its stock price since late 2021. In fact, Ark is betting Tesla stock could soar to $1,533 by 2026, a tenfold increase from where it trades today.
The company posted a record 1.31 million vehicle deliveries in 2022, a 40% jump compared to the prior year. It also generated record revenue of $81.4 billion, up 51%, and more than doubled its profit with earnings per share of $3.62.
Tesla intends to back up those strong results with another year of record deliveries, anticipating growth above 50% to reach 1.8 million units. But some analysts on Wall Street have been pessimistic because the company has recently slashed prices on its line of EVs, which compresses its profit margin. That was evident in the fourth quarter with its automotive gross margin shrinking to 25.9%, a decline of 470 basis points compared to the same time last year.
It's uncertain how long Tesla is willing to sacrifice its profit margin to keep sales elevated in this tough economy, which is one reason its stock has been hit so hard. But that might present an opportunity because the stock trades near the cheapest levels on record. Its price-to-earnings multiple of 43, while a premium to the broader market, is a far cry from the P/E of more than 100 it traded at throughout 2020 and 2021.
Plus, Tesla is about more than just cars. It's set to enter mass-market robotics later this decade, and it has a booming solar power and battery storage business right now.
Its full self-driving software technology could be the base for its hotly anticipated robo-taxi due for release in 2024. Ark Invest actually thinks that opportunity could be one of the most lucrative in Tesla's history.
There's plenty for Tesla investors to look forward to, so buying the stock at the current price might be a smart move for the long run.
NASDAQ: SHOP
Key Data Points
It might be time to buy this growth stock, which is on sale
Jamie Louko (Shopify): The e-commerce industry has faced the full brunt of the uncertain economy and high inflation. With consumers worried about rising prices and what the future holds for their finances, they have been dramatically cutting back on their number of discretionary purchases.
And there's no doubt that Shopify has been feeling the pain. Revenue growth has fallen notably over the past few years, with third-quarter 2022 revenue growth of just 22% on a year-over-year basis, reaching $1.4 billion.
The site was growing its top line by more than 90% year over year in each quarter in the back half of 2020. This has resulted in a plummeting stock price. In 2022, the shares got cut by 75%.
Yet Shopify's adoption is still trending higher compared to the broader e-commerce space. Etsy (ETSY 4.75%), for example, saw its third-quarter top line increase just 12% compared to the year-ago period. Shopify is even outpacing stalwarts like Amazon (AMZN 0.08%), whose online store revenue rose just 7.8% in the third quarter.
Despite Shopify's far faster growth compared to peers (which will likely result in market share gains), the company's valuation is now near record lows. The e-commerce stock is currently valued at 11.6 times sales, which is close to its lowest since 2016 (excluding late 2022).
Cathie Wood's ARK Invest has been selling some of its shares of Shopify in 2023, but ARK's conviction remains high considering the company is still ARK's seventh-largest position across all of its ETFs. With Shopify at its cheapest valuation in years, now might be the time to buy a few shares of this Cathie Wood favorite.
NASDAQ: ROKU
Key Data Points
The most popular streaming platform
Trevor Jennewine (Roku): The domino effect created by high inflation has been a major drag on many ad-based businesses. As consumer spending has slowed in response to rising prices, many brands have cut their ad budgets to compensate.
That trend has led to a series of dismal financial results for Roku. Revenue increased just 23% to $3.1 billion over the trailing 12 months, a sharp deceleration from 66% growth in the prior year. And the company generated negative free cash flow of $129 million.
Those metrics are very disappointing, and many investors have clearly lost confidence the company. The stock is currently 69% off its high.
But Roku is one of many struggling ad businesses. Alphabet's Google is largest digital advertiser in the world, and its revenue increased just 6% in the most recent quarter. That points to an industrywide problem, not a material weakness in Roku's business.
That means the investment thesis is still solid: Roku is the most popular streaming platform in North America and Mexico in terms of viewing time. Roku has such a strong foothold in those markets that its platform accounted for an industry-leading 30.5% of global streaming time in the second quarter. That gives the company nearly twice as much market share as the next-closest streaming platform, Amazon Fire TV.
Looking ahead, Roku is set to maintain that lead or even gain market share. Its Roku OS is the best-selling smart-TV operating system in the U.S. and the second-best in Mexico, indicating strong consumer demand.
Roku also plans to build its own smart TVs, and the company recently launched a lineup of other smart-home devices, including cameras and video doorbells. Those products should bring more consumers to the Roku platform, making the company a more valuable advertising partner.
It's investing in licensed and original content for its ad-supported streaming service, The Roku Channel, and that strategy is driving engagement. The channel once again ranked among the five most-viewed channels on the platform in the U.S. during the third quarter.
With that in mind, online video ad spend is expected to increase at nearly 14% annually to reach $362 billion by 2027, according to technology research site Omdia. That means Roku is a key play in a large and growing market. And with shares currently trading at 2.4 times sales, a significant discount to the three-year average of 13.3, this Cathie Wood stock is a buy.
