Ark Investment Management CEO Cathie Wood's portfolio of funds have struggled over the past few years as growth stocks took a beating in a bearish market. Investors, along with Wood and Ark Invest, are hopeful that the Fed's interest rate hikes will stop in the near future, potentially opening the door to a growth stock rebound.
The various stocks that Wood and her investment firm are purchasing for their investment funds of late include three that will be discussed more below. Now might be a good time for a closer look at these three Cathie Wood stocks, before their valuations start rising again.
1. Unity Software
Unity Software (U 0.96%) is a major player in the gaming industry, with more than half of the world's video games using its engine. That's a noteworthy catalyst for the next decade given gaming is a high-growth market globally. However, Unity's opportunity extends beyond traditional gaming thanks to rising interest in virtual reality and the metaverse. The company's software can also be deployed in these virtual spaces, so demand is likely to accelerate as people engage more deeply with digital worlds.
As demand continues to grow, Unity is evolving to provide a more comprehensive suite of software and services for developers. Its platform includes tools that help developers monetize games through advertising revenue. That's an enormously valuable service, and it's an important one if the company wants to gain and retain market share in a changing competitive landscape.
Image source: Getty Images.
As is the case with many Cathie Wood stocks, Unity is a fairly speculative buy. The stock's forward P/E ratio is over 80, and its price-to-cash-flow ratio is even higher. Some of that is simply due to Unity's focus on expansion and product improvements rather than profitability -- the stock's price-to-sales ratio is only around 8, which is closer to the range of its more established tech peers. It's important to note that the company's sales actually shrunk last quarter on a pro forma basis, adjusting for the impacts of acquisitions last year. That's on the heels of only 9% growth in the prior quarter. It's uncommon to see that sort of valuation premium for a business that's struggling with growth, so the market is clearly baking in some future success and assuming that Unity will swing to profitability as sales rebound.
2. Trimble
Trimble (TRMB 1.18%) is known for its positioning and navigation technology, but it's grown into a more diversified logistics leader. In addition to navigation, the company provides analytical tools and services. This package provides vital insights that allow customers in the agriculture, transportation, and construction industries to maximize their efficiency. This puts Trimble in an interesting position at the head of disruptive automation in traditional industrial activities. Investors might be distracted by artificial intelligence (AI) in the higher-profile software world, but that revolution is also transforming other sectors.
While first-quarter revenue fell slightly relative to the prior-year period, annual recurring subscription revenue (ARR) increased 13%. Despite the revenue decline, the company delivered much higher gross margin and significant net income. It also produced more than $200 million in free cash flow, an improvement of roughly 30%. Trimble isn't going to light the world on fire with its growth, and it expects to expand around 6% this year. That's respectable performance amid the current economic headwinds in the company's target industries.
The shares trade at a forward P/E ratio below 20 and price-to-cash-flow ratio around 27. It's one of the few Cathie Wood stocks generating strong cash flow while sporting a value stock valuation right now.
3. Bill Holdings
Bill Holdings (BILL 1.19%) offers software for financial functions such as billing, payments, document tracking, and expense analysis. Its mission is to provide AI and automation tools that enhance capabilities for small and midsize businesses (SMBs) that otherwise wouldn't be able to afford an entire team to handle those functions. This reduces the overhead required to run a smaller-scale business, improving efficiency and creating more opportunities for founders.
Bill is generating phenomenal momentum. Its revenue grew more than 60% year over year last quarter, with subscription fees rising 28% and transaction fees increasing 52%. That caused a sharp improvement on the bottom line, with reduced operating losses allowing the company to generate nearly $24 million in free cash flow. Bill is expanding through both new and existing customers, and more than 450,000 SMBs now use the service.
Despite that momentum, shares have taken a beating since the market tumbled last year. Its forward P/E ratio was cut in half to 64, and the stock is down 60% from its all-time high.
BILL PE Ratio (Forward) data by YCharts
That forward P/E ratio isn't exactly cheap, but the price has undeniably rationalized over the past year. High interest rates and slowing economic growth have created new opportunities among growth stocks like Bill. It's still somewhat expensive, but investors can feel more comfortable with the risk profile and long-term return potential.
