Cathie Wood, founder and CEO of Ark Invest, has become a famous figure in the financial world. Her asset management company eschews traditional investment strategies, which often seek short-term gains in safe benchmarks. Instead, Ark focuses on long-term capital appreciation created by disruptive technology companies.
Specifically, Wood and her team run six thematic index funds constructed around innovative technologies such as automation, the blockchain, fintech, and robotics. Collectively, those funds have $16.5 billion invested across 122 companies. But more than 15% of that total was invested in just two stocks at the end of December:
The flagship Ark Innovation ETF has outperformed the S&P 500 (SNPINDEX: ^GSPC) by about 20 percentage points since its inception in 2014. That market-beating performance is particularly impressive, given that the fund currently trades 67% below its all-time high.
In any case, Wood and her team clearly have a great deal of confidence in Coinbase and UiPath. Here's what investors should know about these growth stocks.
Coinbase Global: 9.1% of Ark's portfolio
Coinbase provides cryptocurrency exchange and wallet services. Its platform allows retail and institutional investors to trade, stake, and store various crypto assets, and it allows users to interact with decentralized applications or dApps across various blockchains. Coinbase primarily earns revenue through (1) transaction fees and (2) interest on USDC reserves through an agreement with the stablecoin's issuer, Circle. That makes its business very sensitive to market sentiment and interest rates.
Coinbase has been prudent in growing its business, always prioritizing reliability and reputation. CEO Brian Armstrong recently said, "We continue to do the work of running a trusted, secure, and compliant crypto platform. And this is our competitive advantage." That strategy has paid off. Coinbase is the most popular U.S. cryptocurrency exchange, and the largest in terms of trading volume.
Coinbase reported reasonably solid financial results in the third quarter, beating expectations on the top and bottom lines. Sales increased 14% to $674 million, reflecting a 21% decline in transaction revenue offset by a 59% increase in subscription and services revenue. Strength in the latter segment was driven by interest income on USDC reserves. Coinbase also made strides toward GAAP profitability. Its net loss narrowed to $2.3 million, much improved from the $545 million loss it reported last year.
During the quarter, Coinbase continued to lean into international expansion, launching in Canada and registering as a cryptocurrency exchange with the Bank of Spain. The company grows its market opportunity with each new geography, but its future is ultimately tied to the volatile cryptocurrency market. As a result, Coinbase has been (and will probably continue to be) a volatile stock.
Analysts at Morningstar believe the cryptocurrency market will achieve a market capitalization of $5.8 trillion by 2032, implying annualized growth of 15% over the next nine years. The company also expects Coinbase to gain share because of brand authority and international expansion efforts, meaning its revenue could certainly compound at a double-digit pace during that period.
In that context, its current valuation of 14.5 times sales, a premium to the two-year average of 5 times sales, is somewhat reasonable. I would wait for a cheaper price before buying Coinbase stock, simply because the current valuation is so much higher than the historical average, but I wouldn't fault investors for taking a stake today.
UiPath: 6.4% of Ark's portfolio
UiPath specializes in business automation software. Its platform blends robotic process automation (RPA) with artificial intelligence (AI) capabilities to (1) analyze tasks and processes to identify automation opportunities, (2) build software robots that automate select tasks and processes, and (3) deploy and manage those software robots across the business.
RPA improves operational efficiency by automating simple tasks like moving files or extracting data from structured forms. AI augments those capabilities to support more complex automations, such as understanding and acting on document data. The platform also uses a type of AI known as computer vision to recognize and interact with user interface (UI) elements -- hence the name UiPath -- such that it can automate tasks in most applications.
Consultancies Forrester Research and Gartner have consistently recognized the company as the market leader in RPA software. That's encouraging for shareholders because RPA is one of the fastest-growing verticals in the software market, according to Morgan Stanley. Also noteworthy, UiPath has been recognized as a leader in the adjacent verticals of task mining, process mining, and intelligent document processing software.
UiPath reported reasonably good financial results in the third quarter, though difficult economic conditions continued to be a headwind. Revenue increased 24% to $326 million and non-GAAP net income more than doubled to reach $69 million.
Grand View Research expects the RPA market to compound at 40% annually through 2030, driven by particularly strong demand for blended RPA and AI solutions. UiPath is leaning into that demand with new AI products. For instance, Autopilot is a generative AI assistant that allows users to run existing automations and build new automations with natural language.
On that note, UiPath should manage solid double-digit sales growth through the end of the decade. As a point of reference, Morgan Stanley analysts believe revenue could increase at 21% annually over the next 10 years. That forecast makes its current valuation of 9.7 times sales -- a premium to the two-year average of 11.4 times sales -- look reasonable. Investors should consider buying a small position in this growth stock today, provided they plan to hold for at least five years.
