Cathie Wood's Ark Invest targets the companies of the future to derive massive growth. Stocks like Amazon and Netflix brought massive returns for their investors by pioneering new industries, and Wood believes that similar pioneers today could eventually deliver impressive gains shareholders.

In particular, Wood and her team seek stocks it hopes will transform their respective industries. Wood's investments in Zoom Video Communications (ZM 1.57%) and Twilio (TWLO 1.47%) hold such potential.

Zoom

It may look like Zoom's time in the sun has come and gone. The stock boomed during the COVID-19 pandemic as people scrambled for a method of communication that was affordable, workable, and safe during the pandemic lockdowns. Consequently, Zoom stock boomed during this time, reaching an intraday peak of almost $589 per share in the fall of 2020.

However, the stock would steadily fall over the next two years. And while the stock price may have stabilized, it sells at a discount of about 89% from that all-time high.

Despite that disappointment, investors should look at its changes since the lockdowns. Zoom has actively targeted enterprise, or paying, clients, which will boost the top line. Ark Invest believes this customer base will grow at a compound annual growth rate (CAGR) of 11%. With webinars, artificial intelligence (AI)-enabled products, and other functions, Zoom's CAGR should grow to 26%, taking the stock to an expected $1,500 per share by 2026, according to Ark.

Admittedly, this growth has not yet appeared in the financials. In the first quarter of fiscal 2024 (ended April 30), revenue of $1.1 billion rose by only 3% from year-ago levels. Also, net income came in at $15 million, versus $114 million in the same quarter last year. Rising operating expenses took a toll on the bottom line, but income from investments allowed Zoom to turn a profit under generally accepted accounting principles (GAAP).

Moreover, Zoom seemed to miss out on a potential bull market in the first half of 2023. Year to date, the stock has fallen by approximately 5%, compared to big gains for stock market benchmarks.

Still, the price-to-sales (P/S) ratio of 4 is down from its peak of more than 120 in 2020. Also, Zoom stock sells for just 15 times forward earnings, near record lows, as the company just recently turned profitable. Hence, even if Ark Invest's price prediction turns out to be wildly optimistic, a recovery in customer growth rates could take Zoom significantly higher over the next few years.

Twilio

Like Zoom, Twilio boomed on pandemic-driven demand for its communication platform as a service (CPaaS). Twilio enables voice, chat, email, and video communications on apps, which is appealing for businesses such as Uber Technologies and Airbnb.

Twilio stock boomed during the pandemic, reaching as high as $457 per share in early 2021. But from there, it sold off steadily. With that decline, the software-as-a-service (SaaS) stock sells at an 86% discount to that 2021 high.

Twilio's first-mover advantage and the difficulty of changing providers played a significant role in sustaining the stock. Consequently, as the 2021 bull market receded, investors became increasingly concerned about potential competitors and years of losses. 

However, the company has added some functionality, like a built-in contact center called Twilio Flex, which saves its customers from having to add such functionality in-house.

Twilio has also benefited from AI, combining that with customer profiles and data to improve customer data platforms and customer service. Wood believes software stocks will benefit after Nvidia's recent success. As the leading CPaaS stock, much of that benefit should accrue to Twilio; the stock is up more than 25% this year.

Twilio hasn't shied away from addressing losses, including two rounds of layoffs over the last 12 months. Admittedly, these have not yet appeared in the financials. In Q1 2023, revenue of $1 billion rose 15% versus the same quarter last year. But amid rising operating expenses, the net loss increased to $342 million, up from $222 million in the year-ago quarter.

Nonetheless, analysts believe it will turn profitable soon, and this has led to a forward P/E ratio of 43. Also, its P/S ratio of 3 is far below the peak sales multiple of 37 in early 2021. Those valuations could add to the appeal of Twilio stock as its financials improve.