Catherine Wood (Trades, Portfolio) is the founder of Ark Investment Management, an investment firm running a collection of ETFs that reported over $11.5 billion worth of stocks in its latest 13F filing for the fourth quarter of 2022.
Ark Invest’s strategy focuses on investing in growth stocks in disruptive industries. Ark analyzes macroeconomic factors such as the declining cost of EV batteries, or the growth in AI, in order to help inform investment opportunities. In 2020, Ark rose to fame after making many bold growth bets that ended up doing incredibly well in the near-term. In particular, Wood's estimates that Tesla's (TSLA, Financial) stock price would increase by a blistering ~1,000% between 2020 and 2021 came true.
However, since the bull market faltered in 2021 and the economy began to deteriorate, growth stocks got crushed. A positive is inflation has started to fall since its high of 9.1% in June 2022, so I believe growth stocks could rebound. Thus, in this article, we will go over two growth stocks that Wood's firm continued to buy more of in the fourth quarter of 2022, despite the tepid market environment; let’s dive in.
1. Coinbase
Coinbase (COIN, Financial) is a pioneer in the crypto market that was founded in 2012, nearly five years earlier than its rival Binance. Its founder Brian Armstrong (who is now the CEO) had the vision to create a trustworthy and safe platform for crypto trading. This may seem like a simple endeavor, but back in 2012, crypto was like the wild west. Even in 2022, cryto is still fraught with risks, as we saw the collapse of the popular crypto exchange FTX. In the world of crypto (and finance in general), capital flows to the most trustworthy institutions in the long term. Therefore, Coinbase is poised to benefit as it positions itself as a leader in this category as the industry consolidates and becomes more regulated.
More regulation is great for industry leaders as it effectively raises the barriers to entry. Coinbase even scored a major partnership with the world's largest asset manager Blackrock in the third quarter of 2022, which is a testament to the company’s solid trustworthiness and technology. Blackrock aims to use Coinbase in order to offer cryptocurrency trading on its Aladdin platform.
In March 2023, Coinbase also announced the acquisition of One River Digital, which is a unit of a hedge fund that serves a variety of institutional clients such as pension funds. This acquisition signals a move towards a greater focus on the institutional market, which is less volatile than the retail investing segment.
Improving financials
Coinbase reported improving financial results for the fourth quarter of 2022. The business generated revenue of $605 million, which increased by 5% sequentially and surpassed analyst forecasts by $590 million. This is a positive sign, but the company still has a long way to go given its net revenue has declined by 75.7% year over year.
The overall decline in revenue was mainly driven a substantial decline in Bitcoin and crypto trading. The price of Bitcoin peaked in November 2021 and the peak revenue of Coinbase also peaked at that level.
It was also interesting to discover its “Other Crypto Asset” trading declined from 68% of total volume in the fourth quarter of 2021 to just 33% of total volume by the recent quarter. I believe this makes sense given the decline in speculative crypto coins and ICOs which were abundant in 2020 and 2021.
Wood previously forecast that any crypto crash would cause a “flight to safety” towards the most well-known assets such as Bitcoin. Judging by Coinbase's earnings reports, that prediction was correct. Bitcoin trading volume as a percentage of the total increased from just 16% in the year-ago quarter to 35% by the fourth quarter of 2022.
Coinbase’s institutional trading as a percentage of revenue increased from 67.8% a year ago approximately 87% in the recent quarter. This indicates that Institutional investors are still net bullish on Coinbase.
Moving on to profitability, Coinbase reported a loss per share of $2.64, which beat analyst forecasts by $0.05. This was a positive sign given operating income has plummeted extensively from $1.46 billion a year ago an operating loss of 474.5 million in the recent quarter.
Coinbase has a solid balance sheet with $4.425 billion in cash and short-term investments versus debt of $3.6 billion.
Valuation and guru investors
Coinbase trades at a price-sales ratio of 4.55, which is substantially cheaper than its five-year average.
Ark Invest purchased a staggering 1.47 million shares of Coinbase in the fourth quarter of 2022, during with shares traded for an average price of $52.69. As of the quarter's end, the firm owned 9.18 million shares of the stock.
Growth stock investor Baillie Gifford (Trades, Portfolio) also increased its position in Coinbase stock to a total of 7,494 shares as of the quarter's end.
2. Roku
Roku (ROKU, Financial) is a technology hardware company that sells streaming devices and smart TVs. Its products basically enable users to easily access content from a variety of major streaming providers from Netflix to Hulu and Amazon Prime.
The company also enables content providers to run advertising. This helps support its “Roku Channel” subscription service, which includes a variety of TV shows and movies.
Solid financials
Roku reported solid financial results for the fourth quarter of 2022. Its revenue was $867 million, which beat analyst forecasts by $64.7 million and increased by 0.2% year over year. This may not seem like amazing growth, but the company did increase its active accounts by 4.6 million to 70 million in total.
Its number of streaming hours on its platform has also increased by 23% year over year to a record 87.4 billion hours.
Moving on to profitability, the company reported a loss per share of $1.70 for the quarter, which beat analyst expectations by $0.03.
The company also has a strong balance sheet with $1.96 billion in cash and short term investments versus total debt of just $719 million.
Valuation and guru investors
Roku trades at a price-sales ratio of 2.89, which is over 75% cheaper than its five-year average. The GF Value chart indicates a fair value of $284 per share and thus the stock is “significantly undervalued” at the time of writing.
Ark Invest purchased 197,115 shares of Roku in the fourth quarter of 2022, during which shares traded for an average price of $52.25. GuruFocus real-time picks also reported that Wood's firm purchased a further 211,408 shares of the stock in late January 2023, when shares were trading for an average price of $57.50. As of then, the firm owns over 12.3 million shares of the stock in total.
Other gurus buying Roku during the fourth quarter included Ray Dalio (Trades, Portfolio)'s Bridgewater Associates.
Final thoughts
Both Coinbase and Roku are two great technology companies. Coinbase established itself as a leader in the crypto market and its number of institutional investor partnerships gives it a competitive advantage. However, the future success of the company is still dependent upon the future of crypto assets. Roku on the other hand is poised to benefit from the growth in streaming as more households “cut the cable” and look for an easy way to modernize their home entertainment.
