Cathie Wood made a name for herself in 2020. The founder and CEO of ARK Investment managed five flagship exchange-traded funds (ETFs) that crushed overall market returns last year, each returning more than 100%. The results are not too surprising, given Wood’s focus on emerging and disruptive technologies that received a boost during the pandemic.
Finding companies that are market leaders in their respective areas, have strong secular tailwinds, and have large and growing addressable markets can generate groundbreaking returns that could earn you a fortune. Let’s look at three companies Wood was buying last week that fit the bill.
Twilio: the leader in application and software-based communication
One of the most important conclusions of 2020 was the need for customers to be able to communicate with companies quickly and easily without having to find the right channel. That is where Twilio (New York Stock Exchange: TWLO) enters. Real-time text message? Control. In-app customer service chats? Control. One-click phone calls? Control.
While it is not a household name, many clients use the company’s tools without even knowing it. Estimated arrival of Uber Y Lyft? The real-time update that your table is ready now through Yelp? Online chat with you Dell Customer Service Representative? If you’ve experienced any of those (or a multitude of others), it’s very likely the result of Twilio’s technology. The company provides the basic cloud-based components that help companies communicate with their customers, all without leaving the application.
The company gained a large number of new converts last year. Revenues grew 55%, while adjusted earnings were up 57%. Strong customer acquisitions fueled its growth as Twilio’s total active customers increased 23% to 221,000. Not only is the company attracting new users, but its existing customers are spending more, as evidenced by its dollar-based net expansion rate, which grew to 139%.
Twilio has high ambitions, however, with the goal of becoming the leading customer engagement platform. It is moving toward that goal, with the recent acquisitions of email communications specialist SendGrid and customer data platform Segment. These expanded the company’s already considerable opportunity. Management now forecasts that Twilio’s total addressable market will grow to $ 87 billion by 2023. The company generated revenue of just $ 1.76 billion in 2020, helping to illustrate the magnitude of the opportunity ahead.
With all that in favor of the company, it is not surprising that ARK innovation (NYSEMKT: ARKK) ETF and ARK Next Generation Internet (NYSEMKT: ARKW) ETFs increased their positions in Twilio last week, and now account for 2.45% and 2.3% of their holdings, respectively.
Teladoc: the future of medicine
Another lesson learned over the last year has been the ease and usefulness that telemedicine offers. The ability to see your healthcare provider without leaving the comfort of your home has implications that will last well beyond the pandemic. As a leading provider of telehealth services, Teladoc Health (New York Stock Exchange: 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 diminish, 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 physical office visits, while 60% said they planned to use digital solutions. telehealth even more in the future.
Teladoc was already generating impressive growth, but the pandemic accelerated its results. Revenue grew 98% year-over-year in 2020, with solid growth in patient visits soaring 206%. The company’s net loss also increased, affected by a combination of acquisition-related expenses and income tax complications. The cancellation of those one-time charges resulted in Adjusted EBITDA that increased 298%.
The company also acquired Livongo Health, a leader in chronic disease management through connected devices. There are more than 147 million patients in the US alone who have at least one chronic condition. Giving patients strategies to help manage these conditions is a rare win-win, as it improves quality of life and reduces the cost of medical care for those with diabetes, hypertension, weight control, prevention of diabetes 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 lucrative road ahead.
Wood joined Teladoc’s already sizeable holdings last week, with ARK Next Generation Internet, ARK Innovation and ARK Genomic Revolution (NYSEMKT: ARKG) ETFs all adding stocks. This brought Teladoc to 4%, 6% and 7% of its holdings, respectively, making it one of the top 10 positions in all three funds.
Zillow: the leader in digital real estate
Zillow (NASDAQ: Z) (NASDAQ: ZG) He was a pioneer in digital real estate long before the pandemic reared its ugly head, but there’s no denying that the past year helped raise the company’s profile. Many investors can still associate Zillow with its pioneering home value estimating website, which made most of its revenue from real estate-related advertising.
In recent years, however, the company has evolved and now handles digitally-enabled real estate transactions and adjacent services. Its technology and application-based services are well positioned for the future evolution of home buying and selling. Zillow’s inventory of homes for sale plummeted during the height of the pandemic, but has rebounded markedly in recent months.
Despite the negative effect of the pandemic, Zillow increased revenue by 22%, but that doesn’t tell the whole story. The company’s core Internet, media and technology (IMT) segment, which still generates most of its revenue, was hit the hardest, growing just 14% year-over-year. At the same time, its housing segment increased revenues by 26%, while its fledgling mortgage segment was up 73%. It’s these newer, high-growth companies that should excite investors the most. Zillow’s Adjusted EBITDA grew to an all-time high last year, which bodes well for the company’s future profitability.
By reaching into all corners of the real estate transaction, Zillow has dramatically expanded its opportunity, 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, highlighting the long and lucrative road ahead.
Zillow was back in ARK Invest’s shopping cart last week, as ARK Next Generation Internet and ARK Innovation were acquiring shares. The online realtor now accounts for 2.36% and 3.46% of the fund’s holdings, respectively, and is one of the top 10 holdings in both funds.
The small print
Given ARK Invest’s surprising ETF results last year, it’s hard to find fault with Wood’s stock selection acumen, but the devil is in the details. With a significant concentration in technology, only two of the five flagship ETFs are outperforming the S&P 500 so far this year, while three are topping NASDAQ – but 2021 is still young.
It’s also worth noting that while these three stocks were investments that outperformed the market last year, they aren’t cheap using traditional valuation metrics. Twilio, Teladoc, and Zillow sell for 23, 15, and six times sales, respectively, when a good price-to-sell ratio is generally between one and two.
That said, investors, including Cathie Wood, have been willing to pay for the cutting-edge technology, age-old tailwinds, and massive addressable markets each of these companies offer.
This article represents the opinion of the author, who may disagree with the “official” recommendation position for a premium Motley Fool consulting service. We are variegated! Questioning an investment thesis, even one of our own, helps all of us think critically about investing and make decisions that help us be smarter, happier, and wealthier.