Cathie Wood's Ark Invest had a good 2023. Its flagship Ark Innovation ETF soared 68%, easily outpacing the three major U.S. financial indexes. In positioning itself for 2024, the firm has 12.8% of its portfolio allocated to just two stocks: Tesla (TSLA -1.11%) accounts for 6.2% of invested assets, and Coinbase Global (COIN 5.68%) accounts for 6.6%.
Here's what investors should know about these growth stocks.
1. Tesla
The investment thesis for Tesla centers on its strong market presence in battery electric vehicles and its opportunities with adjacent artificial intelligence (AI) software and services. Tesla accounted for an industry-leading 19.2% of battery electric vehicle sales through November 2023. Price cuts have crushed its once industry-leading operating margin, but profitability should rebound as interest rates decline, Cybertruck production scales, and Tesla leans into software and services.
Specifically, management believes full self-driving (FSD) software will become the primary source of profitability over time. Tesla already sells FSD beta subscriptions in North America, and the product could launch in Europe by next summer. The company also plans to license its FSD software to third-party manufacturers. Numerous automakers have agreed to standardize around Tesla's charging network, and a similar outcome is plausible with its FSD software.
Additionally, Tesla will monetize FSD by providing robotaxi services, meaning it will launch an autonomous ride-hailing business at some point in the future. Management has not provided specific details, but the company is targeting volume production of a robotaxi this year. More information should be forthcoming during the next AI day event, presumably sometime in mid-2024.
In any case, Tesla is well positioned to be a leader in autonomous vehicle technology. Data is critical to training machine learning models, and the company has far more autonomous driving data than its peers. CEO Elon Musk believes Tesla's gross margin could trend toward 70%, up from about 20% today, as the company evolves toward software and services.
On that note, Ark Invest believes the robotaxi market could reach $9 trillion by 2030, but Wood and her team are not alone in making bold predictions. Morgan Stanley analyst Adam Jonas believes software and services could push Tesla's addressable market to $10 trillion by 2030, and he expects the company to grow sales at 22% annually over the next eight years.
Shares of Tesla currently trade at 7.7 times sales, a discount to the three-year average of 14.7 times sales. That price looks reasonable if Tesla can indeed grow software and services revenue fast enough to meet Morgan Stanley's forecast, but valuing the stock based on that assumption is risky. Investors who believe Tesla could disrupt the mobility industry should consider buying a small position in the stock today. Investors who see Tesla as little more than a glorified automaker should avoid the stock.
2. Coinbase Global
The investment thesis for Coinbase centers on its position as the largest U.S. cryptocurrency exchange, international expansion efforts, and ability to diversify revenue beyond transaction fees and interest income.
Coinbase has a reputation for security and reliability that has become more pronounced amid turmoil like the collapse of FTX. That brand authority allows the company to charge higher fees than many peers, and it has led to market share gains. Coinbase accounted for 6.8% of global cryptocurrency trading volume in September 2023, up from 4.9% in September 2022, making it the fourth-largest cryptocurrency exchange in the world.
Coinbase primarily earns revenue through volume-based transaction fees and interest income on fiat currency held in reserve for stablecoin USDC. As such, the company depends heavily on trading volume and interest rates. In fact, those sources accounted for more than 85% of total revenue in the third quarter. Revenue from staking services is also climbing, but dependence on volume and interest rates is unlikely to change.
With that in mind, Coinbase continued to expand into new markets last year. The company launched its exchange in Brazil, Singapore, and Canada, and it obtained key licenses in Spain. Coinbase should continue to gain global market share as it moves into new geographies, and that should support growth in transaction revenue and interest income.
Another potential catalyst is the recent approval of spot Bitcoin ETFs. The Securities and Exchange Commission requires cash creations and redemptions, meaning the issuer must trade Bitcoin when shares are added or redeemed. Additionally, Coinbase is the custodian for eight of the 11 approved spot Bitcoin ETFs, meaning it will earn storage fees.
Going forward, Ark Invest believes the cryptocurrency market will be worth $20 trillion by 2030, implying more than 1,100% upside in the interim. Coinbase would undoubtedly benefit from that explosive growth, but investors should view that estimate skeptically. Cryptocurrency is a volatile asset class fraught with regulatory uncertainty.
Wall Street is less bullish. The consensus calls for Coinbase to grow revenue at about 2% annually over the next five years. That makes its current valuation of 10.4 times sales seem quite expensive. Personally, I would wait for a cheaper multiple before buying shares.
