Cathie Wood made a kind of name for herself in 2020. The founder and CEO of ARK Investment managed five exchange-traded funds (ETFs) that crushed returns from the broader market last year, with each returning more than 100%. The results are not very surprising, given Wood’s focus on disruptive and emerging technologies that gained momentum during the pandemic.
Finding companies that are market leaders in their respective areas, boast significant secular winds and have large and growing addressable markets can bring revolutionary returns that can bring you a fortune. Let’s look at three companies that Wood was buying last week that fit that profile.
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Twilio: the leader in software and application-based communication
One of the biggest conclusions of 2020 was the need for customers to be able to communicate with companies quickly and easily, without having to locate the right channel. This and where Twilio (NYSE: TWLO) goes into. Real-time text messaging? Check. In-app customer service chats? Check. One-click phone calls? Check.
Although not a household name, many customers use the company’s tools without ever knowing it. Estimates of arrival of Uber and Lyft? The real-time update that your table is now ready via Yelp? Chat online with your Dell customer service representative? If you have tried any of these (or several others), there is a good chance that it was the result of Twilio’s technology. The company provides cloud-based building blocks that help companies communicate with their customers, all without leaving the application.
The company won a number of new converts last year. Revenue grew 55%, while adjusted profit rose 57%. The robust acquisition of customers boosted its growth, as Twilio’s total active customers increased 23%, to 221,000. The company is not only attracting new users, but its existing customers are spending more, as evidenced by its dollar-based net expansion rate, which has grown to 139%.
Twilio has great ambitions, however, with the goal of becoming the leading platform for customer engagement. It is progressing towards this goal with the recent acquisitions of SendGrid, a specialist in email communications, and the customer data platform Segment. This expanded the company’s already considerable opportunity. Management now predicts that Twilio’s total addressable market will grow to $ 87 billion by 2023. The company generated revenue of just $ 1.76 billion in 2020, which helps to illustrate the magnitude of the opportunity ahead.
With all of this happening for the company, it is not surprising that ARK Innovation (NYSEMKT: ARKK) ETF and ARK Next Generation Internet (NYSEMKT: ARKW) The ETF increased its positions on Twilio last week, now representing 2.45% and 2.3% of its holdings, respectively.
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Teladoc: The future of medicine
Another lesson learned last year was the ease and usefulness offered by telemedicine. The possibility of consulting your doctor without ever leaving the comfort of your home has implications that will last well beyond the pandemic. As a leading provider of telehealth services, Teladoc Health (NYSE: TDOC) is at the forefront of the digital health revolution.
The bears will claim that once life returns to normal, the need for telemedicine will decrease, but the evidence suggests otherwise. A survey of 2,700 patients reported that 90% of respondents said that the quality of care during digital visits was as good, if not better than visits to the physical office, while 60% said they planned to use even more telehealth solutions in the future.
Teladoc was already generating impressive growth, but the pandemic accelerated its results. Revenue grew 98% year-on-year in 2020, with robust growth in patient visits that skyrocketed 206%. The company’s net loss also increased, affected by a combination of acquisition-related expenses and income tax complications. Removing these one-off charges resulted in adjusted EBITDA, which increased 298%.
The company also acquired Livongo Health, a leader in chronic condition management through connected devices. There are more than 147 million patients in the United States alone with at least one chronic condition. Providing patients with strategies to help control these conditions is a rare win-win situation, improving quality of life while reducing the cost of healthcare for those dealing with diabetes, hypertension, weight control , diabetes prevention and behavioral health.
After the merger, Teladoc’s addressable market is estimated at more than $ 64 billion. Given its annual revenue of $ 1.09 billion, there is a long and profitable road ahead.
Wood increased Teladoc’s already considerable holdings last week, with ARK Next Generation Internet, ARK Innovation and ARK Genomic Revolution (NYSEMKT: ARKG) ETFs, all adding stocks. This raised Teladoc to 4%, 6% and 7% of its holdings, respectively, making it a Top 10 position in all three funds.
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Zillow: the leader in digital real estate
Zillow (NASDAQ: Z) (NASDAQ: ZG) was a pioneer in the digital real estate sector long before the pandemic appeared, but there is no denying that last year helped raise the profile of the company. Many investors can still associate Zillow with its pioneering home value estimation website, which has obtained most of its real estate-related advertising revenue.
In recent years, however, the company has evolved and now deals with digitally enabled real estate transactions and adjacent services. Its application-based technology and services are well positioned for the future evolution of home buying and selling. The stock of homes for sale in Zillow fell during the height of the pandemic, but has recovered remarkably in recent months.
Despite the negative effect of the pandemic, Zillow increased revenue by 22%, but that does not tell the whole story. The company’s main Internet, media and technology (IMT) segment – which still generates most of its revenue – was the most affected, growing only 14% year on year. At the same time, the home segment increased revenue by 26%, while the nascent mortgage segment rose 73%. It is these newer, high-growth businesses that should make investors more excited. Zillow’s adjusted EBITDA reached its highest level last year, which bodes well for the company’s future profitability.
Reaching every corner of the real estate transaction, Zillow has dramatically expanded its opportunities, as management estimates that its total addressable market (TAM) has increased from $ 19 billion to more than $ 2.2 trillion. The company generated just $ 3.3 billion in revenue last year, which highlights the long and profitable path ahead.
Zillow was in the ARK Invest shopping cart again last week, with ARK Next Generation Internet and ARK Innovation taking stock. The online broker now represents 2.36% and 3.46% of the funds’ holdings, respectively, and is one of the top 10 holdings in both funds.
Data by YCharts
The fine print
Given the impressive results of the ARK Invest ETFs last year, it is difficult to find fault with Wood’s acumen in stock selection, but the devil is in the details. With a significant concentration on technology, only two of the top five ETFs are hitting the S&P 500 so far this year, while three are hitting the NASDAQ – but 2021 is still young.
It is also important to note that while all three of these stocks were investments that outperformed the market last year, they are not cheap using traditional valuation metrics. Twilio, Teladoc and Zillow are being sold for 23, 15 and six times the sales, respectively – when a good price / sales ratio is usually between one and two.
That said, investors – including Cathie Wood – are willing to pay for the cutting edge technology, secular trends and massive addressable markets that each of these companies offers.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even our own – helps all of us to think critically about investing and making decisions that help us become smarter, happier and wealthier.