Cathie Wood and the Ark Invest team are making some major moves with their largest holdings.
Ark's biggest position in its flagship Ark Innovation ETF (ARKK 1.05%) -- as well as across its entire portfolio of active ETFs -- is Coinbase Global (COIN 5.68%). That's the result of a phenomenal run in the stock tied closely to Bitcoin's performance. Shares increased 391% last year, primarily in the second half.
But Ark has been systematically selling off shares of Coinbase since last summer as the stock price has continued to outpace the rest of its portfolio. It made some more sales of the stock to start off 2024, reducing its weight in the Ark Innovation ETF, as well as in its internet and fintech ETFs.
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The stock the team is buying with proceeds from its Coinbase sales was recently on the outs with Ark, although it remains a top holding. But now that shares have fallen back some from a post-earnings spike, Ark apparently thinks it's time to start buying again. That's why it added Roku (ROKU -10.29%) stock to all three of the ETFs in which it sold Coinbase shares.
Roku is now the third-largest holding in the Ark Innovation ETF, and Ark's analysts think it can climb a lot higher from here. Here's why the team is making the shift in its holdings.
Has Cathie Wood soured on Coinbase?
Ark Invest has aggressively sold off its stake in Coinbase since mid-November. At that point, it had nearly 10 million shares across its ETFs. After its most recent sales, it holds just 7.7 million.
But investors shouldn't get the impression that Wood is any less bullish on Coinbase than she was last summer. The sell-off is purely driven by the strong price appreciation of the stock. In fact, Coinbase's weight in Ark's ETFs increased substantially in that same period when Ark was selling shares. It went from about 7% of the portfolio to 8% today. It even topped 9% in late December, in part due to the strong performance of Bitcoin. As mentioned above, Coinbase remains Ark's biggest holding.
Ahead of Coinbase's IPO in 2021, Wood said Ark's five-year price target on Coinbase well exceeds the 15% minimum annual growth rate it targets, even if the stock debuted at $300 per share. That implies a 2026 price target of at least $600, about 4 times the current share price. What's more, she sees Bitcoin climbing significantly higher from today's price, which could also be a catalyst for Coinbase's growth.
Wood did warn, however, that Coinbase would be a very volatile stock, and that prediction has been spot-on. True to form, she's picked her moments to buy and sell shares, and the latest move is merely an attempt to rebalance and take profits as they come.
Roku could be an even larger holding than Coinbase in the long term
Ark Invest is a big believer in the long-term potential of Roku as well. The team has a $605 price target for its base case on the stock, with their model predicting a 25% chance the stock tops $1,493 per share by 2026.
Ark sold shares in Roku after strong third-quarter earnings. The stock spiked above $100 per share, but it's since fallen back toward a more attractive price. Still, the depressed share price may be short-lived, and Wood is happy to build back a position in Roku at this level.
Roku's revenue increased 20% year over year in the third quarter, accelerating from 11% year-over-year growth in Q2. Revenue growth was a meager 1% year over year in Q1, so it appears the worst is behind Roku.
Management reported positive adjusted EBITDA for the first time since Q1 of 2022. It expects positive adjusted EBITDA in the fourth quarter, and it anticipates full-year positive EBITDA in 2024.
Roku was hit hard by high inflation, rising interest rates, and economic uncertainty, all of which led to a pullback in ad spend on its platform. But with the outlook favoring a soft landing (i.e., avoiding a recession) and strong consumer spending reports, it appears marketers are ready to allocate part of their budgets to its platform again. That should result in strong revenue growth and margin expansion in 2024 and beyond.
At Roku's current share price, it trades for just 3.6x its expectations for 2023 revenue. That's a more-than-fair price to pay for a company with the potential to grow sales by nearly 20% per year for the foreseeable future.
