Ark Invest manages a raft of exchange-traded funds focused on disruptive technologies like artificial intelligence, fintech innovation, and next-generation internet. Its flagship Ark Innovation ETF soared by 67% last year, though it remains more than 70% below its peak.
Ark Invest is somewhat atypical among Wall Street institutions. Portfolio manager Cathie Wood and her team are focused on long-term capital appreciation and recommend an investment horizon of at least seven years. That stands out because Wall Street analysts often measure time in months. The combination of a technology-focused strategy and long-term mentality makes Wood an asset manager worth watching.
With that in mind, Ark Invest has been buying shares of Tesla (TSLA -1.11%) and MercadoLibre (MELI 3.09%) in January. For context, the firm has 6% of its total portfolio in Tesla and about 0.5% in MercadoLibre. Here's what investors should know about these top-notch stocks.
1. Tesla
Tesla hit its target of 1.8 million electric vehicle (EV) deliveries in 2023, but it was still a challenging year for the automaker. Though it led the world in battery electric vehicle sales, rising interest rates over the past two years sapped consumer demand and pushed the company toward price cuts that crushed its once industry-leading operating margin. In 2023's third quarter, total revenue increased just 9% year over year to $23 billion, a sharp slowdown from 56% growth in the prior-year period, and its non-GAAP net income declined 37% to $2.3 billion.
On the bright side, some of that margin pressure came from costs associated with ramping up production of the Cybertruck, and the remaining pressure can be largely attributed to the difficult economy. Those should both prove to be temporary headwinds. Moreover, Tesla also views its vehicles as a means of selling higher-margin software and services, much like Apple uses its iPhones to sell services. In that context, its price cuts were sensible.
Tesla has substantial opportunities in full self-driving (FSD) software, robotaxi services, and cloud artificial intelligence (AI) services through its Dojo supercomputer. Morgan Stanley believes adjacent software and services could create a $10 trillion addressable market by 2030. And Tesla is positioned to be a leader in autonomous vehicle technology simply because it possesses more autonomous driving data than its peers, and data in quantity is the key to training machine learning models.
Grand View Research forecasts that electric vehicle sales will increase at an average rate of 15% annually through 2030, while the autonomous vehicle market will grow by 22% annually. Those tailwinds could drive 20%-plus annual sales growth for Tesla. Indeed, Morgan Stanley analysts expect its sales to grow at a compound annual rate of 22% over the next eight years.
In that context, Tesla's current valuation of 7.6 times sales appears reasonable. But there is a big caveat: Tesla is a risky stock because a large portion of the investment thesis rests on AI software and services that do not exist yet. Bulls should feel comfortable buying a small position today, but bears who lack confidence in the AI narrative should steer clear of the carmaker.
2. MercadoLibre
MercadoLibre has the largest e-commerce and digital payments ecosystem in Latin America. Specifically, it operates the largest online marketplace in the region as measured by revenue, unique users, and page visits, and Morgan Stanley expects the company to continue gaining market share in the coming years.
MercadoLibre also provides complementary financial services, including payment processing through Mercado Pago (the fastest-growing acquirer in Latin America) and credit products through Mercado Crédito. It further cemented its dominance in e-commerce by offering adtech solutions and logistics support, both of which add convenience for merchants.
Those segments are performing well. Its revenues from adtech services have grown by more than 70% year over year in each of the last six quarters, and Insider Intelligence expects MercadoLibre to be the world's fastest-growing adtech company in 2024. Additionally, MercadoLibre's fulfillment network handled 48% of shipped orders in the third quarter, up from 40% in the previous year, and its broader delivery network handled a record 94.2% of shipments during the quarter.
Not surprisingly, MercadoLibre continued to grow at a rapid clip in the third quarter, as shareholders have come to expect from the company. Total revenue increased 40% to $3.7 billion, driven by strong growth across the commerce and fintech segments, and GAAP (generally accepted accounting principles) net income climbed by 178% to $359 million. Top- and bottom-line growth will probably moderate in the years ahead, but MercadoLibre is still primed to create value for shareholders.
Straits Research forecasts that online retail sales will grow by 8% annually through 2030, and Grand View Research estimates that adtech spending will increase by 14% annually and digital payments revenue will increase by 21% annually during the same period. Those are global forecasts, but Latin America should see similar growth given that its economy is expanding at roughly the same rate as the global economy.
In any case, the Wall Street consensus calls for MercadoLibre to grow sales at 24% annually over the next five years. That projection makes its current valuation of 6.5 times sales seem fair, especially when its three-year average is 8.8 times sales. Investors with a five-year time horizon should strongly consider opening a small position in this growth stock today.
