Cathie Wood, the founder of Ark Invest, is one of the market's most closely followed growth investors. But over the past five years, her flagship Ark Innovation ETF (NYSEMKT: ARKK) has declined nearly 6% as the S&P 500 rallied 85%.
Nevertheless, Wood contends that her focus on long-term secular trends will pay off for patient investors who can tune out the near-term noise. So let's look at three of her recent purchases -- Roku(NASDAQ: ROKU), Roblox(NYSE: RBLX), and PagerDuty(NYSE: PD) -- and see if they're worthwhile buys for growth investors.
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1. Roku
Cathie Wood bought 245,896 shares of Roku, which currently have a market value of about $15 million, for the Ark Innovation ETF in June. Those purchases increase the ETF's total stake in Roku to $562 million, making it the fund's second largest holding after Tesla, with a total weight of 9.2%.
However, Roku's stock has declined 34% over the past five years. The bulls retreated as its growth cooled off and it faced tougher competitors in the streaming market.
Roku's revenue rose more than 50% in both 2020 and 2021 as the pandemic drove more consumers to buy its streaming video devices and consume more content, but its revenue grew only 13% in 2022 and just 11% in 2023 as those tailwinds dissipated. Analysts expect its revenue to grow at a compound annual growth rate (CAGR) of only 12% from 2023 to 2026.
Yet Roku is still gaining more active accounts as its streaming hours continue to rise. That expansion should drive the growth of its higher-margin platform business and offset the negative gross margin of its hardware player business.
Moreover, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive in 2023 as it aggressively cut costs, and analysts expect that figure to grow at a CAGR of 347% over the next three years. That's a decent outlook for a stock which trades at 29 times next year's adjusted EBITDA.
2. Roblox
Wood scooped up 1.53 million shares for Roblox, which are worth $57 million today, for the Ark Innovation ETF in May and June. It now owns a $344 million stake in Roblox, making it the fund's the fourth largest holding, with a total weight of 5.6%.
Roblox's gaming platform enables its users to create, share, and monetize their own video games with a simple block-based system without any coding knowledge. That simple approach made it popular with tween users during the pandemic.
Its bookings surged 171% in 2020 and grew another 45% in 2021, but rose only 5% in 2022 as its core audience went back to school. That deceleration challenged the bullish belief that its creator-driven flywheel would generate consistent long-term gains, and its stock has declined more than 40% since its direct listing debut in March 2021.
Yet Roblox's bookings grew 23% in 2023, as its growth in daily active users and hours engaged -- driven by its rising popularity among older and overseas users -- offset its nearly flat growth in average bookings per daily active user.
From 2023 to 2026, analysts expect its bookings to grow at a CAGR of 16% as its adjusted EBITDA rises at a CAGR of 34%. Based on that outlook, its stock still looks reasonably valued at 29 times next year's bookings.
3. PagerDuty
Lastly, Wood bought 815,239 shares of cloud-based software company PagerDuty, which are now worth nearly $18 million, for the Ark Innovation ETF in June and early July. The fund now owns a $184 million stake in the company, which ranks 11th among its investments and accounts for 3% of its portfolio.
PagerDuty's cloud-based platform makes it easier for IT professionals to respond to infrastructure problems by streamlining their on-call schedules, escalation policies, and alert mechanisms with its digital workflow tools.
From fiscal 2020 to fiscal 2023, which ended in January 2023, its revenue rose at a CAGR of 30% as its total number of paying customers grew 20%. But in fiscal 2024, its revenue grew only 16% as its total number of paying customers dipped 1%. It blamed that slowdown on the macro headwinds that drove companies to rein in their cloud spending, but it also faces tough competition from similar platforms like Cisco's Splunk and the digital workflow leaderServiceNow(NYSE: NOW).
From fiscal 2024 to fiscal 2027, analysts expect PagerDuty's revenue to increase at a CAGR of only 12%. However, they expect its adjusted EBITDA to grow at a CAGR of 20% as it streamlines its spending. Based on those estimates, PagerDuty's stock seems cheap at 15 times next year's adjusted EBITDA -- but it would arguably be smarter to stick with larger and faster-growing leaders like ServiceNow instead of this underdog.
Should you buy any of these stocks?
I'm not a fan of Cathie Wood's investing style, and I wouldn't rush to buy these three stocks. But if I had to choose one, I'd pick Roblox because it's growing faster, it dominates its growing niche, and its stock still looks reasonably valued. The other two face too many macro and competitive challenges to be considered worthwhile investments.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems, PagerDuty, Roblox, Roku, ServiceNow, and Tesla. The Motley Fool has a disclosure policy.
