Last year, Cathie Wood was able to break away from the pack. The founder and CEO of ARK Investment Management made a name for herself when her five flagship exchange-traded funds (ETFs) crushed the returns of the broad market, each returning more than 100% during 2020. Her focus on emerging technologies and disruptive companies has fueled impressive results, attracting a cult-like following for the fund manager.
Since mid-February, however, the tide has turned and technology stocks have fallen out of favor as investors searched for companies that would benefit from the ongoing pandemic-related recovery. The tech-heavy Nasdaq Composite initially climbed more than 9% to start the year, before giving back all of those gains -- and then some. Since then, some of Wood's favorite stocks have been selling at a significant discount.
Let's take a look at the stocks Cathie Wood was scooping up last week as many technology issues continued to languish.
The Sea's the limit
The goal of the ARK Fintech Innovation ETF (NYSEMKT:ARKF) is to find the most compelling opportunities in financial technology, including mobile payments, digital wallets, peer-to-peer lending, and blockchain technology. With that as a backdrop, it's easy to see why Wood has been buying up shares of online sales platform Sea Limited (NYSE:SE).
Shopee, its digital retail arm, has quickly become the e-commerce leader in the fast-growing market of Southeast Asia. Sea Limited serves seven key markets in the region, including Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia, and Singapore. What makes it a fit for the Fintech Innovation fund is the company's nascent and rapidly growing digital payments business, SeaMoney. This homegrown digital payment method is integrated with Sea Limited's successful e-commerce and video game businesses, giving it a captive audience.
It has much bigger ambitions, however, having recently acquired Composite Capital Management, a global investment management firm licensed in Hong Kong. This development could move Sea Limited far beyond its humble digital wallet roots.
The company grew revenue by 101% in 2020 with no signs of slowing. E-commerce sales were the flag bearer, up 160%, while bookings for its video game business jumped 80% (it doesn't yet break out its fintech operations). Sea Limited isn't profitable right now, but it's worth noting that net losses widened just 11% last year as it continues to leverage its growing ecosystem.
Sea Limited is a Top 5 holding in the ARK Fintech Innovation fund, at 4.33% of the fund's $1.96 billion of funds under management. During the recent temporary rotation out of tech stocks, Sea Limited shares tumbled as much as 30% on no company-specific news, which no doubt factored into Wood's buy decision.
Shop till you drop
Speaking of the growing influence and importance of e-commerce, it isn't surprising that Shopify (NYSE:SHOP) is among Cathie Wood's favorite investments, found in three different ARK funds.
Aside from providing all the tools to set up and run digital retail operations, Shopify helps coordinate sales on multiple channels, including web, mobile, social media, online marketplaces, brick-and-mortar locations, and pop-up shops. The company also handles many of the day-to-day details, including product management, inventory, payments, and shipping. It even offers businesses working capital loans.
Business is booming for Shopify. Revenue grew 86% in 2020, while gross merchandise volume (GMV) climbed 96%. At the same time, its payments business accounted for 45% of GMV, up from 42% the prior year, as more merchants adopted its payment solution. Perhaps most importantly, the company hit a tipping point in 2020, notching its first full year of profitability.
Because it provides all the tools merchants need to succeed in online commerce, Shopify is a Top 5 position in the ARK Next Generation Internet ETF (NYSEMKT:ARKW), which focuses on big data, e-commerce, and cloud computing, among other disruptive technologies. Shopify is also a Top 10 position in both the ARK Innovation ETF (NYSEMKT:ARKK), which focuses on disruptive innovation, and the aforementioned Fintech Innovation fund. The recent pressure on tech stocks took a toll on Shopify, which also declined nearly 30%. It shouldn't be surprising, then, that both the Fintech and Next-Gen Internet funds scooped up Shopify shares last week.
A Square deal
Another Cathie Wood favorite is Square (NYSE:SQ). The company created the flagship Square credit card dongle that connects to virtually any smartphone, making it a point-of-sale device. Square has since expanded its ecosystem to include the consumer-facing Cash App, which facilitates person-to-person payments via a smartphone app, competing with PayPal's Venmo.
Square also hopped on the Bitcoin trend early, allowing users to trade in the red-hot cryptocurrency. Now, more than half the company's revenue is related to Bitcoin, though roughly 2.5% of what it books from cryptocurrency drops to the bottom line. Square recently announced it purchased additional Bitcoin, which now accounts for roughly 5% of the cash and equivalents on its balance sheet.
In all, revenue in 2020 more than doubled, while gross profit surged 52%. Net income slumped 43%, though that was due to the dearth of physical retail during the pandemic. Cash App active users grew 50% year over year.
Square was also caught up in the tech rout with shares plummeting as much as 27% from their February highs. That was likely one factor in Wood's decision to stock up on additional shares. That said, if you're looking for proof of Wood's confidence in Square's future, consider this: It's the No. 1 holding of the Fintech Innovation fund at a whopping 10.3% of the fund's net assets -- but that's just the beginning. It's also the No. 2 holding of the ARK Innovation ETF at 6.5% and the No. 3 holding of the ARK Next Generation Internet ETF at 5.7%. This gives Square the distinction of being one of Wood's highest-conviction holdings.
Should investors follow suit?
This all leads to the inevitable question: Should investors follow the example set by Wood? The answer to that question depends entirely on your personal investing situation and risk tolerance. By loading the portfolios with disruptive companies, there has been a commensurate increase in the volatility of the ETFs. Look no further than early March for evidence. In the aforementioned tech slump that rocked markets between February and March, all of ARK's funds trailed the S&P 500, some by a wide margin.
It's also worth noting that while all three stocks crushed the results of the broad market last year, they're certainly not cheap in terms of traditional valuation metrics. Shopify, Sea Limited, and Square are selling for 48, 27, and 12 times sales, respectively, when a good price-to-sales ratio for a stock is generally between one and two.
That said, investors have been willing to pay up for the cutting-edge technology and potential for spectacular gains that each of these companies offers. Just ask Wood.