3 bargains that Cathie Wood loves

In 2020, there was no bigger investing star than ARK portfolio manager Cathie Wood. main sound ARK Innovation ETF (NYSEMKT:ARKK) jumped 156.61% that year, catapulting Wood’s status as an expert in the field of disruptive growth stocks.

However, 2021 has not been so kind, with the fund down 23.56%. And 2022 doesn’t look any better, with the ARKK ETF already down 10.74% on the year.

After the strong sell-off in growth stocks, investors may want to check Wood’s portfolios for high-quality, battered names that may have been punished too much. Here are three that look particularly cheap today, not only relative to Wood’s other high-growth portfolios, but also on an absolute basis.

Image source: Getty Images.

Splunk

IT infrastructure, cybersecurity and application observability company Splunk (NASDAQ: SPLK) is Wood’s 15th largest holding company ARK Next Generation Internet ETF (NYSEMKT:ARKG). Believe it or not, even though Splunk is a loss-making, high-growth software company, it’s actually on the rise in the first two weeks of January. Few software companies can say the same.

This could be because Splunk had already had a very difficult 2021 before the swoon from November. The stock is still down 29.2% from a year ago and 46.2% from its all-time highs. Even after the positive start to the year, the stock is trading at only 7.7x sales, well below the average high-growth SaaS stock.

But Splunk is even cheaper than that. The company is going through several transitions, from selling perpetual licenses to subscriptions, as well as deploying its on-premises services at customers to the cloud. These transitions resulted in lower revenue in fiscal 2021, as large one-time sales were replaced by lower but recurring annual or monthly payments. But the company is past the bulk of the transition, so revenue growth has turned positive again this year and is accelerating now.

When looking at Splunk’s annualized recurring revenue (ARR), which adjusts for its multiple transitions, the ARR figure of $2.83 billion is more than 10% higher than revenue of $2.52 billion. from Splunk over the last 12 months. ARR was also up 37% last quarter, compared to revenue growth of just 19%. And the growth of ARR in the cloud was 75%, well above the overall growth rate of ARR.

Splunk appears to be more than halfway through its transition, with 68% of reservations moving to the cloud last quarter. At the end of the transition, revenues should approach the ARR.

Growth is expected to remain strong as cloud growth accounts for a larger share of overall revenue and customers continue to build more digital infrastructure, all of which needs to be secured and monitored. Accelerating growth and a low valuation are why Splunk was my favorite software stock this year.

Skill

video game platform Skill (NYSE: SKLZ) is in both ARK’s Core Innovation Fund and Next Generation Internet Fund. The company has developed a two-sided platform that allows mobile gamers to play against each other for cash or points, and developers to reach new audiences and monetize their content in a way different.

Skillz went public through a Special Purpose Acquisition Company (SPAC) in December 2020 and hit a high of $46.30 before the recent growth stock crash sent the stock plummeting to around $6 today. This is below the initial price of $10 at which most SPACs fundraise.

Of course, Skillz is still losing money – a lot of money compared to its earnings. In the last quarter, the adjusted EBITDA margin was -45.5%. Wall Street has also pretty much dismissed SPACs as an asset class in recent months, another reason the stock has fallen so much.

However, the hate may have gone too far. Skillz increased its revenue by 70% in the last quarter, and its opportunity remains very important. Mobile gaming was an $86 billion industry in 2020 and is growing in double digits.

In the last quarter, $611 million in gross market volume (GMV) passed through Skillz’s platform, which Skillz’s revenue capture rate was $102 million. This represents approximately a GMV rate of $2.5 billion and a revenue rate of $410 million. The company therefore still has a fairly small market share. And with a market cap of just $2.5 billion, Skillz only trades around 6 times its sales. That sounds pretty cheap for a company whose sales are growing 70%, and that only scratches the surface of its international opportunity. On January 3, Skillz launched a pilot program in India. If he finds success there, it’s 1.4 billion new additional people who will soon be able to play games on the Skillz platform.

Yes, future earnings are a question, but Skillz has a gross margin that exceeds 90%. So if Skillz scales enough, it could be a very profitable business one day. Meanwhile, founder and CEO Andrew Paradise bought $5 million worth of Skillz stock on the open market in November, at an average price of $11.50. You can buy shares for almost half that price today.

loan club

loan club (NYSE:LC) is another cheap stock you can find in the ARK Fintech Innovation ETF (NYSEMKT: ARKF). Like many fintech stocks, LendingClub sold off heavily late last year and into January. Investors appear to view these stocks more as high-risk tech than financial stocks, which have held up better in the face of rising rate concerns.

While LendingClub started as a technology platform connecting personal loan borrowers with yield-seeking investors, it is now much more of a bank, following its acquisition of Radius Bank in February 2021. LendingClub will always be a platform. form, but it will also keep 15-25% of its loans on its own balance sheet, backed by new low-cost deposits from Radius.

Change is a big deal. Although LendingClub had similar loans last quarter to the fourth quarter of 2019, it is making a lot more money.

Metric

Q4 2019

Q3 2021

Origins

$3.1 billion

$3.1 billion

Income

$188.5 million

$246.2 million

GAAP net income

$0.2 million

$27.2 million

Data source: LendingClub Q3 presentation.

Yet even this impressive new profitability underestimates LendingClub’s earnings trajectory, because it has to fund all future charges when it makes a loan, but receives interest income over three to five years. So if LendingClub ramps up origins quickly, as it is currently, provisioning costs may be higher than normal.

LendingClub just returned to profitability in the second quarter, so its trailing 12-month earnings are still negative, which could explain why the stock has been halved since mid-November. But investors may be unaware of the fact that LendingClub now looks more like a highly profitable bank. Analysts expect earnings per share next year to be $1.73, so LendingClub shares are trading at only 14 times those estimates, making it the rare value stock that has found its way into Cathie Wood’s portfolio.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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