The markets lately are a mix of gains and volatility, and it’s tough, sometimes, for investors to make sense of it. In times like these, it makes sense to turn to the experts. Cathie Wood is one such expert, an investor whose stock choices have consistently outperformed the overall markets.
A protégé of famed economist Arthur Laffer, market guru Wood has built her reputation on her clear view of the markets. Her firm is Ark Invest, whose Innovation ETF has over $52 billion in assets under management, making it one of the largest institutional investors on the scene. And better yet, Wood’s stock choices paid back during the ‘corona year;’ the ETF’s overall return in 2020 was an astounding 170%.
With returns like that, it’s clear Cathie Wood knows what she’s talking about when she picks a stock. So, we’re taking a look at three of her stock choices, all from the ‘top 10’ of her firm’s holdings, by percentage weight within the portfolio. Using the TipRanks platform, we’ve found that, according to some Street analysts, each has at least 40% upside potential for the coming year. Let’s get the lowdown.
Teladoc Health, Inc. (TDOC)
The first stock on our list, Teladoc, was one of the ‘early adopter’ companies in the telehealth sector, making remote medical care available for non-emergency issues. Patients can use Teladoc to consult on ear-nose-throat matters, lab referrals, basic diagnoses and medical advice, and prescription refills for non-addictive substances. Teladoc bills its service as offering remote house calls by primary care doctors.
Despite the obvious benefits of Teladoc’s service during the pandemic year, and steadily rising revenues, the company’s stock has underperformed the broader markets in the last 12 months. A look at the most recent quarterly report – for 1Q21 – will shed some light.
The company reported $453.6 million at the top line, up an impressive 150% year-over-year. Earnings, however, told a different story. At $199.6 million, the net loss in Q1 was much deeper than the year-ago quarter’s $29.6 million loss. Per share, the loss came to $1.31, compared to just 40 cents one year earlier. The losses weighed on investors’ minds, but the company guidance was more worrisome. Management predicts that paid membership will be flat yoy in 2021. The stock fell 10% after the earnings release.
Cathie Wood, however, started buying shares, taking advantage of the dip in price to increase her holdings of TDOC. Her firm bought up more than 716K shares, worth over $122 million at the time of purchase. Teladoc is Ark’s #2 holding, making up over 6% of the fund’s portfolio.
While BTIG analyst David Larsen notes investors’ concerns, he believes the long-term outlook for the company remains positive.
“The issue that may weigh on the stock, is 2021 membership guidance of 52 – 54M (+2% y/y) was left unchanged,” Larsen said. “Despite this headwind we still like the company and the stock. Management highlighted that the ‘pipeline for membership’ is now up more than 50% y/y, which is higher than what was reported in 4Q:20, and many of these deals are progressing. TDOC also won a large BCBS plan in the north-east due to the “whole person” model, and it’s a competitive take-away. We believe that management’s comments around membership pipeline are very calculated, and we would expect 2022 membership growth to be far better than 2021’s growth rate.”
In line with his comments, Larsen rates TDOC as a Buy, and his $300 price target implies an upside of 83% for the year ahead. (To watch Larsen’s track record, click here.)
Overall, Teladoc gets a Moderate Buy from the analyst consensus, a rating derived from 23 reviews that include 14 to Buy and 9 to Hold. The shares are priced at $163.21 and have an average price target of $243.68, making the one-year upside a robust 49%. (See Teladoc’s stock analysis at TipRanks.)
Zoom Video Communications, Inc. (ZM)
Next up, Zoom, needs no introduction. This tech-based video communications company had a low profile in 2019, but in the corona crisis of 2020 Zoom came of age. The company saw a tremendous expansion, in use and user base, and its stock peaked in November 2020 with a price well above $500 per share. It has since declined – but even after that decline, ZM shares still show a one-year gain of 121%.
The share price decline in Zoom may be best seen as temporary volatility in a stock that is otherwise sound. Zoom went public in April of 2019, and has reported sequential revenue and earnings gains in every quarter since – with the gains accelerating last year. For Q4 of fiscal 2021, the last reported, Zoom reported $882.5 million at the top line, up 13.5% sequentially and a whopping 368% year-over-year. EPS in the last quarter was 87 cents; this compares to just 5 cents per share income the year before. Zoom reported $377.9 million in free cash flow for 4Q21, compared to $26.6 million one year earlier.
In customer metrics, Zoom reported equally strong growth. It had more than 467K customers with more than 10 employees, growth of some 470% yoy, and 1,644 customers who paid more than $100,000 in the trailing 12 months, up 156% yoy.
As for Cathie Wood, she thinks that Zoom will continue growing, saying, “I think it’s going to usurp a lot of the old telco infrastructure.” Two of Wood’s Ark funds own shares of Zoom, over 2.4 million shares in total, Zoom makes up roughly 3.40% of Ark’s portfolio.
5-star analyst Daniel Bartus, from Merrill Lynch, also likes ZM shares, and writes of the company’s model, “In our view, Zoom’s superior video experience has solidified its position as the go-to meetings platform post-COVID. As the pandemic lingers and enterprises adopt more flexible workforces, we believe 2021 will be another good year for Zoom. Post-pandemic, we believe Zoom remains well-positioned as the new communications standard and the upsell of Zoom Phone, Rooms, and additional features across the 467k customer base offsets the churn risk across smaller customers.”
Bartus puts a Buy rating on the stock, with a $480 price target suggesting a potential upside of 52% for the coming year. (To watch Bartus’s track record, click here.)
Wall Street’s views on Zoom offer a bit of a conundrum. The analyst consensus here is a Hold, based on reviews that include 6 to Buy, 10 to Hold, and 2 to Sell. On the other hand, the stock’s $444.40 average price target implies an upside of 41% on the one-year horizon. (See Zoom’s stock analysis at TipRanks.)
Shopify, Inc. (SHOP)
Last on our list of Wood’s picks, Shopify, is a Canada-based e-commerce giant that needs no introduction. Shopify has been around for 15 years, and was an early leader in providing e-commerce platforms to third parties. The company’s services include payment processing, marketing, shipping, and customer engagement.
Shopify grossed $2.93 billion last year, and has seen sequential revenue gains in each of the last four quarters. While the stock has found 2021 more of a slog, it is still up by 77% over the past 12 months, handily beating the S&P 500’s 47% one-year gain.
Starting out 2021, Shopify reported 110% year-over-year revenue growth for the first quarter, with the top line reaching $988.7 million. The company’s EPS in Q1, $9.94 per share, was inflated by unrealized gains from an equity investment, making comparison difficult, but the company also reported $7.87 billion in cash holdings as of the end of March, compared to $6.39 billion at the end of December.
The solid gains in revenues and cash holdings are supported by a growing user base. Shopify’s mobile app, Shop, now has over 107 million registered users, of whom 24 million are monthly active users. And, the company has good word-of-mouth advertising; 45,800 of its ‘partners’ referred a fellow merchant to the service in the previous 12 months, a yoy gain of 73%.
Looking at all of this, Cathie Wood thinks we may be seeing the start of the ‘next Amazon.’ She says, referring to the company’s position in the marketplace and its prospects for growth, “Shopify doesn’t care who wins. It’s going to be involved with many, if not most, of all of the sites that are going to be powering up commerce.” Her Ark funds are gobbling up shares of SHOP – they own over 690K, worth more than $754 million at current valuation.
Colin Sebastian, 5-star analyst with Baird, agrees that Shopify is a stock to buy. He writes, “we view higher spending levels as supporting the enormous e-commerce market opportunity, sustaining a high level of innovation in platform services, and maintaining a high level of scalability. As such, we would be buyers of shares on any pullbacks related to margin commentary… We believe that Shopify will continue to be a key beneficiary of the migration toward multi-channel e-commerce as companies leverage and integrate a broad range of consumer touch-points to drive sales — including traditional offline, online, in-store, mobile, kiosks and call centers.”
Sebastian’s price target here, $1,550, suggests an upside of 42% for the next 12 months. His rating is Outperform (i.e., a Buy). (To watch Sebastian’s track record, click here.)
High-profile tech companies tend to attract a lot of attention, and Shopify has picked up no fewer than 30 analyst reviews in recent weeks. These break down to 16 Buys, 13 Holds, and just a single Sell, making the analyst consensus a Moderate Buy. The shares are priced at $1,092.01, and the average price target of $1,482.21 implies they have room to gain 36% this year. (See Shopify’s stock analysis at TipRanks.)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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