Cathie Wood believes society is in the midst of an unprecedented rise in innovation. Technologies such as artificial intelligence (AI) and robotics could lead to a boom that will continue to bring outsize gains to many stocks.
Indeed, Wood has purchased dozens of stocks seeking to capitalize on the various innovations her team at Ark Invest has targeted. And buying high-quality stocks that have fallen recently increases the chances of earning high returns over a decade. With that in mind, now might be a good time to look at Block (SQ 2.32%), UiPath (PATH 0.26%), and The Trade Desk (TTD 1.67%).
1. Block
Block's shares have struggled amid lower gross payment volumes and the slowing growth in gross profits. The company, which owns the Square ecosystem and the digital wallet Cash App, has frustrated investors with its profit picture as it has reported lower but continuing net losses. The stock fell 14% the day after its Aug. 3 quarterly report, and its slide continued in subsequent trading sessions.
But investors seemed to overlook that its $3.6 billion gross profit in the first half of 2023 increased 30% from year-ago levels. This included a 17% increase in gross profits for the Square segment and a 43% surge for Cash App.
Investors should also remember its compatibility with Bitcoin. Revenue related to Bitcoin fluctuates with the price of the cryptocurrency, which means Block's gross profit is a better indication of its financial health. But if Bitcoin continues to rise over the next 10 years, it could help set the Square ecosystem and Cash App apart from other fintech stocks.
Block has fallen year to date. Still, with a price-to-sales (P/S) ratio of around 1.7, the bargain price of the stock gives investors all the more reason to buy shares now.
2. UiPath
UiPath attracted attention from Wood and her team with its robotics process automation (RPA), which automates repetitive business tasks, freeing up employees' time. That approach has helped it stand above the competition.
However, UiPath has failed to hold on to gains since falling 11% in late May following the release of its report for the first quarter of its fiscal 2024 (ended April 30).
Fiscal first-quarter revenue grew 18% year over year to $290 million, cutting the net loss to about $32 million from $123 million last year. Nonetheless, net annual recurring revenue (ARR) fell by more than half from the previous quarter. Moreover, growth rates are far below pandemic levels, as UiPath reported 47% revenue growth as recently as fiscal 2022.
Still, the price-to-sales ratio of 8 leaves UiPath near historically low valuations. As companies look to reduce labor costs, UiPath could experience an increase in demand within the next 10 years. Such potential could finally translate to gains as UiPath helps more companies cut costs.
3. The Trade Desk
The Trade Desk offers a demand-side adtech platform allowing advertisers to buy and manage online ads. Through its system, clients can run their ad campaigns, target audiences, measure performance, and apply the data they collect from the process.
The company maintains a retention rate above 95%, but that did not stop the stock from suffering last year amid a slump in the ad industry. The stock is up more than 60% this year. Still, it has pulled back over the previous month, as the Aug. 9 quarterly report failed to impress investors.
The failure wasn't with earnings. Its $847 million in revenue for the first half of 2023 rose 23% versus the same period last year. Also, holding down operating expenses, and earnings from noncore sources, left it with $42 million in net income in the first six months of the year. This is a considerable improvement from the $34 million loss in the first half of 2022.
Valuation could have influenced the sell-off. Even after a pullback, the stock sells for around 22 times sales. Nonetheless, the sales multiple stayed well above 30 during the previous bull market. And given the rapid revenue growth and the recent turn to profitability, The Trade Desk might perform well over a 10-year time horizon despite its high cost.
