Few on Wall Street have made more of a splash in recent years than Cathie Wood. The co-founder and CEO of Ark Investment Management focuses on next-generation technologies that will lead the world in the coming decades.
Ark Invest offers a number of tech-heavy exchange-traded funds (ETFs) chock-full of some of the most disruptive technologies of our time. Artificial intelligence (AI), digital payments, electric vehicles, autonomous ride-hailing, and robotics are just some of the secular trends Wood believes represent "technological breakthroughs evolving today and creating the potential for super-exponential growth tomorrow," according to Ark's recently released Big Ideas 2023 report.
Ark made a particularly bullish call regarding digital leisure spending, which totaled roughly $6.6 trillion in 2022, but is expected to soar to $22.5 trillion by 2030.
Let's focus on two areas within digital leisure and highlight the companies best poised to benefit from these gale-force secular tailwinds.
Image source: Getty Images.
Connected TV -- Winner: The Trade Desk
Connected TVs (CTVs) are commonplace these days, with roughly 85% of U.S. households having access to at least one. The devil is in the details, however, as the CTV market represents just 23% of U.S. TV ad budgets. Ark notes: "In our view, CTV is at an inflection point and will take share from both linear TV and other digital ad budgets." The report further suggests that a "meaningful disconnect exists between viewership and advertising budgets in the U.S. ... [and] advertisers will close the gap within the next five years."
That's where The Trade Desk (TTD 3.35%) comes in. The company's state-of-the-art system helps ad buyers target the right consumers -- and CTV is The Trade Desk's strongest growth driver. The shift from traditional broadcast TV to CTV has been a boon to the company, as "advertisers shift dollars from linear TV to connected TV," according to CEO Jeff Green. He went on to note that "CTV and premium video is the fastest-growing digital advertising channel worldwide."
This has helped fuel The Trade Desk's robust growth over the past year, even as other ad tech stocks have faltered. Revenue of $1.58 billion grew 32% in 2022, while adjusted earnings per share (EPS) climbed 14%. This resulted in strong free cash flow and operating cash flow of $450 million and $549 million, respectively. Perhaps as importantly to investors, The Trade Desk has been consistently profitable since 2013.
At nearly 13 times next year's sales, the valuation might seem lofty, but consider this: Even in the face of economic headwinds, analysts expect The Trade Desk's revenue to grow by 20% in 2023 and 21% in 2024. Its consistent growth has fueled the stock price, which has soared 3,283% since its IPO in late 2016.
Digital wallets -- Winner: Block
Once upon a time, cash was king, but that was before the advent of the digital wallet. In fact, over the past seven years, digital wallets have been stealing market share from credit cards, debit cards, and cash. Digital wallet users numbered 3.2 billion in 2022, but that number is expected to soar to 5.6 billion by 2030, according to Ark.
By onboarding millions of merchants to their platforms, fintech providers will eliminate many of the intermediaries, allowing them to capture a larger portion of the fees charged for each transaction.
Among digital wallet providers, Block (SQ -1.57%) is the poster child for this trend. Ark noted that Block paid out roughly 60% of the customer transaction fees it collects to third parties in the form of interchange, assessment, processing, and bank settlement fees. However, by adding merchants and encouraging Cash App customers to use their balances, the company's piece of the pie could increase substantially.
In fact, Ark estimates that Block's net take rate -- which currently stands at about 1.15% -- could more than double to 2.6%, at least in a perfect world. However, even if the company isn't able to capture all of the available fee from each transaction, even capturing a larger part would be a boon to it and to shareholders.
At 1.8 times next year's sales, Block is the very definition of a bargain. Economic headwinds have temporarily stifled consumer spending and Block's growth, but this too shall pass. Analysts' consensus estimates are calling for revenue growth of 14% this year and 15% in 2024. Plus, while it's been a wild ride, patient investors have been amply rewarded. Block stock has surged 429% since its public debut in late 2015.
