Investors tend to do best when they focus on making investment choices that work toward meeting their specific financial needs and goals. But what if they don't yet have a clear understanding yet of what those goals are? What if they are still learning about what they want as an investor?
In some cases, it can help to study the teachings and actions of prominent capital allocators they trust. Veteran investors like Warren Buffett and Peter Lynch are two prime examples of people with a clear investing philosophy that newer stock buyers can learn from.
Another prominent investor, Cathie Wood, is getting attention these days for her investing philosophy and has attracted a following. Her firm, Ark Invest, focuses on buying shares in tech-centric companies, including many that disrupt the industries they operate in. Her flagship investment fund, the Ark Innovation ETF (ARKK 1.05%), has gained a reputation for outperformance and is up about 30% so far in 2023, besting the rise of the Nasdaq Composite index this year.
There are several well-known businesses that Cathie Wood and her team have added to this fund over the years, and some are currently trading at significant discounts to previous high prices. Let's take a closer look at three of them: Block (SQ 2.32%), Coinbase Global (COIN 5.68%), and Roku (ROKU -10.29%). All of these businesses have massive market opportunities ahead of them, which is certainly why Wood and her team are shareholders.
1. Block
Block is a fintech leader that serves both small merchants and individual consumers. Its gross profit of $1.9 billion in the second quarter was up 27% year over year. That's a slowdown from gains posted in prior years, but it's still healthy growth given the uncertain macroeconomic environment.
On the merchant side, Square offers a suite of hardware, software, and financial services that not only allow retailers to accept card payments, but complete a wide range of tasks to help them run their businesses more seamlessly. One of the key trends lately is Square's popularity with larger merchants, a positive development because it can lead to lower cyclicality in gross payment volume that might be more common with smaller and more economically sensitive merchants.
Consumers have flocked to Cash App, a personal finance tool with 54 million monthly active users. Cash App is consistently ranked as the top finance app on the Apple App Store. And it benefits from having extremely low customer acquisition costs, especially compared to traditional financial institutions.
At the moment, Block shares trade 80% below their all-time high from 2021. Investors now have the chance to buy the stock at a price-to-sales (P/S) multiple of 1.7, a huge discount to its historical average of 6.1. It's not a surprise that Cathie Wood's Ark Invest has been consistently adding to its position this year. Add that cheap valuation to Block's nearly $200 billion gross profit opportunity and the potential for strong returns are there.
2. Coinbase Global
The cryptocurrency market downturn has been a major headwind for Coinbase, which still depends heavily on high trading volumes for its success. When digital asset prices decline, investor interest wanes, and this has a direct impact on the company's financials.
Although the cryptocurrency market recovered somewhat in 2023, Coinbase still faces a difficult operating environment. Net revenue in the most recent quarter totaled $663 million, down from $803 million in Q2 2022. And the number of monthly active users declined.
It's encouraging, though, that Coinbase has been able to significantly lower its expenses in the face of pressured demand for its services. The business's Q2 net loss of $97 million was a massive improvement from the $1.1 billion net loss from a year ago. Minimizing losses, coupled with cash and equivalents of $5.2 billion, raises the chances that Coinbase can weather a prolonged market downturn.
While it's still down 79% from its all-time high, the stock has done well and is up 111% so far in 2023. This mimics the gain of the overall crypto market. And it's a key reason investors would want to own shares. Coinbase can be viewed as a bet on the growth of the entire crypto industry, something Cathie Wood and her team are extremely bullish will happen. In fact, Ark has been an investor in Coinbase for more than two years now.
3. Roku
Roku is probably on Cathie Wood's list of top holdings because of its advantageous position in its industry. The digital media player manufacturer and streaming platform operates a three-sided business, connecting viewers with their favorite media content in a connected-TV environment that also attracts advertisers. This somewhat insulates the business from the so-called streaming wars, particularly as Roku aims to be an agnostic participant.
Roku's user base is still growing, as active accounts jumped 16% year over year to 73.5 million. And engagement remains high. The average account streamed 3.8 hours of content per day on Roku in the last quarter. But investors might be worried by the fact that the average revenue per user declined 7% year over year in Q2. Management believes this trend will reverse itself once the digital ad industry starts to recover with a stronger economic backdrop.
Working in Roku's favor is the long-term secular shift away from traditional cable TV. The number of households that have cut the cord rises each year, providing a powerful tailwind for the company. It's not hard to figure out that Cathie Wood likes to invest in broad changes in consumer behavior. Roku fits squarely in this category.
Share prices are on a tear in 2023, soaring 96% so far. But they're still 83% off their peak price from a couple of years ago. Consequently, the P/S ratio of 3.5 looks like a sweet deal given the huge potential this business possesses.
