Many investors follow Cathie Wood's latest trades for her ARK Innovation ETF (ARKK 1.05%), but it's been a wild ride over the past two years. The famed growth investor's flagship exchange-traded fund suffered a 67% drawdown in 2022 as rising interest rates pummeled growth stocks -- but it's rallied 36% this year as many of her top holdings bounced back.
Two of those top holdings are Coinbase Global (COIN 5.68%) and UiPath (PATH 0.26%), which saw their shares rise 50% and 35%, respectively, since the beginning of 2023. Coinbase is currently Ark Innovation's sixth largest holding, with a weight of 5.7%, while UiPath is its fourth largest position and accounts for 6.6% of its portfolio. Should investors buy either of these Cathie Wood-approved growth stocks right now?
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Cathie Wood takes the contrarian view on Coinbase
Coinbase is one of the world's largest cryptocurrency exchanges. Its revenue surged 545% to $7.36 billion in 2021 as the buying frenzy in speculative investments drove cryptocurrency prices to their all-time highs. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also skyrocketed 676% to $4.09 billion.
But in 2022, Coinbase's revenue tumbled 51% to $3.15 billion, and its adjusted EBITDA turned red with a loss of $371 million. That decline was largely caused by rising interest rates, which drove many investors away from growth stocks and cryptocurrencies. Last June, Coinbase CEO Brian Armstrong warned that a new "crypto winter" was beginning.
As a result, Coinbase's stock declined 86% in 2022. Analysts expect its revenue to decline another 10% to $2.87 billion this year, but they also expect it to generate a positive adjusted EBITDA of $457 million as it aggressively reins in its spending. Moreover, Coinbase's revenues have risen sequentially over the past two quarters as the crypto market gradually stabilized. Coinbase's stock also looks reasonably valued at four times this year's sales and 23 times its adjusted EBITDA.
But in early June, Coinbase's stock stumbled after the U.S. Securities and Exchange Commission (SEC) sued the company, alleging that it was "operating as an unregistered securities exchange, broker, and clearing agency." Coinbase has vowed to fight those charges, but those regulatory headwinds won't dissipate anytime soon. Nevertheless, Wood bought an additional $21.6 million in Coinbase shares for three for Ark Invest's ETFs after the SEC launched its lawsuit. That's a bold contrarian move that defies a lot of bearish takes on Coinbase and the broader cryptocurrency market.
Cathie Wood's faith in UiPath could pay off
UiPath's robotic process automation (RPA) tools can be integrated into a company's existing software applications to automate repetitive tasks like entering data, processing invoices, sending out mass emails, and onboarding customers. The market's demand for these software robots will probably continue to grow as more companies digitally streamline their businesses.
UiPath's revenue rose 47% to $892 million in fiscal 2022, which ended in January 2022, and it turned profitable on a non-GAAP (generally accepted accounting principles) basis with a net profit of $45 million. But in fiscal 2023, its revenue rose only 19% to $1.06 billion, while its non-GAAP net income grew 78% to $80 million.
UiPath's growth cooled off the macro headwinds and forced companies to rein in their spending on sweeping software upgrades. However, its aggressive cost-cutting measures -- which included two rounds of layoffs -- stabilized its earnings growth.
The company expects its revenue to rise about 20% to $1.27 billion in fiscal 2024 as its non-GAAP operating income increases 158% to $168 million. Analysts expect its adjusted earnings to grow 143% for the full year. Those optimistic forecasts suggest that UiPath's growth should accelerate again once the macro environment improves.
The rise of "generative AI" platforms like ChatGPT could generate tailwinds as well as headwinds for UiPath. On one hand, UiPath believes the integration of generative AI tools into its software robots will expand their skill sets and make them more efficient. But on the other hand, popular generative AI platforms like ChatGPT might eventually challenge UiPath with their own software robots for leading enterprise software applications.
Yet Wood doesn't seem too concerned about those long-term challenges. She continued to accumulate more shares of UiPath for her Ark ETFs all throughout 2022, even as its stock tumbled 71%. UiPath's stock bounced back this year, but it still seems a bit pricey at 51 times forward earnings and eight times this year's sales.
The clear winner: UiPath
I wouldn't rush to buy either of these stocks right now. But if I had to choose one over the other, I'd pick UiPath over Coinbase for three simple reasons: It's growing faster, it isn't tethered to the volatile crypto market, and it doesn't face any regulatory headwinds. That said, investors also shouldn't blindly follow Cathie Wood's trades. Ark's holdings represent a good starting point for finding promising growth stocks -- but investors should do their own homework before pulling the trigger.
