Cathie Wood's Ark funds are controversial to some investors, as they invest in some of the most cutting-edge technologies. While the technologies themselves are not controversial, the prices her funds paid for some of the stocks are. The funds became prominent during the tech bubble of 2021 and came crashing down shortly after.
This caused the funds' investors to lose a lot of money and question Wood's investment strategy. Still, Wood has had lots of success and her funds' investing moves are worth watching.
Let's look at two stocks the Ark funds have recently purchased and see if they could make strong investments.
1. Block
At the end of March, some Ark funds purchased shares of Block (SQ 1.11%), the company formerly known as Square. The purchases followed a report from noted short-seller Hindenburg Research alleging that Block inflated user data to make the business seem like it was doing better than it was. Ark funds used the share-price weakness caused by the short report to add to their stash of Block shares, increasing their stake in the company and indicating their faith in Block.
Block issued a press release denying Hindenburg's claims while hinting at legal action against Hindenburg. We'll likely hear more from Block about this report during its Q1 earnings call on May 4, and for now, the stock looks attractive, down over 15% since the short report was published.
To end 2022, Block posted 40% gross profit growth to $1.66 billion in the fourth quarter. Cash App was the key driver, as its gross profit grew 64% and it now makes up the majority of Block's gross profit.
As digital payments become common, Block will be a prime benefactor of the transition, which is why the Ark funds invest in Block. In addition to its enticing prospects, the stock trades at a historically low price-to-sales (P/S) valuation.
SQ PS Ratio data by YCharts
While investors will want to hear what more Block management says about the short report, the stock is attractively priced right now (assuming the short report is wrong). Wood's Ark funds may be on to something here, and Block is worth looking at as a long-term investment.
2. Unity Software
Like Block, Unity Software (U 3.56%) stock has fallen on rough times.
But multiple Ark funds purchased shares of Unity Software shares throughout April, and it's not hard to see why.
Unity Software specializes in highly realistic animated graphics. Its products can be used in movies or to make an architect's building design interactive via augmented reality. However, its primary use for most of its life has been for video game development.
In 2022, Unity merged with ironSource, an app creation company. Combined, these two should allow game developers to create best-in-class mobile games while monetizing and analyzing the users.
Unfortunately, the company has stumbled along the way. Game developers rely on advertising revenue to monetize their products, and Unity Software had problems with its advertisement algorithm earlier in 2022, which caused some headwinds.
Additionally, the company is unprofitable, losing $919 million in 2022 on $1.39 billion in revenue. With $550 million coming from stock-based compensation, investors must keep an eye on adjusted metrics.
With management projecting an 11% to 14% margin in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2023, the company won't produce any real profits, because this metric subtracts stock-based compensation. However, the company expects to grow revenue by about 53%.
Like Block, Unity Software trades at a bargain P/S valuation for a software stock.
U PS Ratio data by YCharts
While Unity Software needs to cut its stock-based compensation bill, the stock is almost too cheap to ignore. Moreover, with the mobile gaming market expected to grow at a 15% compound annual growth rate through 2026, plus its augmented and virtual reality integrations boosting the picture, Unity Software has a bright future.
With Cathie Wood's funds increasing their Unity Software position by 12% during the firs quarter, it's clear Ark sees promise in the company. Although the stock makes up only 2.5% of Ark's total portfolio, it is Ark's 13th largest holding, further cementing the value Cathie Wood sees in Unity.
Both Unity Software and Block have issues, but also lots of promise. They could be big winners for investors.
