Cathie Wood Bets Big on Just 3 Stocks

What Did Cathie Wood Just Buy? Cathie Wood’s positions on high-growth tech stocks have made her a feature of the investment landscape since her ARK funds launched in 2014.

 

While Wood invests in a large range of innovative companies, three stocks currently make up over 15 percent of her portfolio.

 

Here are the three stocks Cathie Wood is betting big on and what investors should know before following her lead.

 

Making up over 7 percent of the total ARK portfolio, Tesla (NASDAQ:TSLA) is the largest single holding across Wood’s funds. With production ramping up rapidly, Tesla could generate nearly $120 billion in revenue next year if current projections hold true.

 

Even among a group of stocks picked for high potential growth, ARK has very optimistic forecasts for Tesla.

 

Accounting for the recent stock split, the firm expects Tesla stock to reach over $1,500 by 2026. With the stock trading at just over $300, this would make Tesla a 400 percent gainer over just the next four years.

Analyst price targets are more modest, suggesting that the stock will likely reach about $330 this year. There is, however, very good reason to believe that Tesla will grow at a solid rate in the coming years.

 

Wood’s bet on Tesla hinges heavily on the company’s upcoming development of autonomous driving technology and the rollout of its ride-hailing program.

 

In conjunction, these two events would allow Tesla to operate a fleet of self-driving taxis without driver input costs. Under ARK’s modeling, this business line could generate as much as $486 billion in annual revenue by 2026.

 

Assuming Tesla’s current plans go ahead uninterrupted, the company could be manufacturing as many as 20 million cars per year by 2030. This goal will likely require the construction of 10 or more of the company’s so-called gigafactories.

 

This capacity, CEO Elon Musk believes, will give Tesla a long-term competitive advantage and create a moat around the company that other manufacturers will find difficult to breach. The combination of this competitive advantage and a high ongoing growth rate could make Tesla attractive, even if ARK’s projections end up being too optimistic.

 

Next among Wood’s largest holdings comes Roku (NASDAQ:ROKU), which makes up 5 percent of ARK’s portfolio.

 

The streaming hardware manufacturer has emerged as a favorite of growth investors looking for inexpensive buys this year. While the entire streaming industry appears to be facing a slowdown, Roku could come out on the other side as a winning investment.

 

Like Tesla, ARK projects an extremely high growth rate for Tesla between now and 2026. The firm expects shares of Roku to compound at 53 percent annually, eventually reaching a target price of $605.

 

ARK’s model depends on Roku accounts, connected TVs and hours spent streaming per day to all rise steadily. It also assumes gross margin increasing to about 59 percent.

This year, analysts forecast Roku stock rising 12.1 percent to $80. This relatively sluggish growth reflects weaker Q2 results.

 

While revenue grew 18 percent over the previous year, the company lost $0.82 per share during the quarter. This compared to earnings of $0.52 in 2021. The losses were attributable to companies throttling their advertising spending, rapidly reducing a key source of income for Roku.

 

Roku is facing its share of challenges, but it is also trading at attractive prices. At 3.23 times sales, Roku is priced well for a stock with its growth potential. The company also holds a debt-to-equity ratio of 0, insulating it from the effects of rising interest rates.

 

The currently low pricing may explain Wood’s recent decision to bulk up her position in Roku. In September, ARK added over $17 million to its Roku holdings.

 

At the time of the purchase, shares of Roku had dropped nearly 20 percent over the last 30 days. As such, Wood is likely using the market’s low pricing for Roku as an opportunity to buy and bolster ARK’s eventual returns.

 

Rounding out ARK’s three largest positions is Zoom (NASDAQ:ZM). The video calling company produced massive returns during the COVID-19 pandemic before crashing back to earth as workers returned to offices and travel restrictions eased. Today, Zoom makes up just under 5 percent of ARK’s portfolio.

 

Despite the troubles that came with the end of the pandemic, Wood seems to remain bullish on Zoom. The ARK target for 2026 projects that Zoom will rise to $1,500 per share, more than 15 times its current price.

 

This growth is largely predicated on blistering revenue increases. Under even ARK’s most bearish forecast, Zoom’s revenues would grow from $4 billion to $30 billion over the next four years.

As has been pointed out many times, this revenue growth projection seems far too optimistic. However, Zoom could have a very positive run of growth that would still propel the stock much higher than its current level. This year, for example, analysts expect ZM stock to rise from $78.69 to $95, generating returns of over 20 percent in the process.

 

Zoom’s risks, however, are also substantial. To begin with, the company’s outlook has dropped significantly since the end of the pandemic. While it hopes to regain consumer use with new products and features, it’s clear that consumers are less interested in video communications in the post-pandemic environment.

 

Zoom also faces intense competition from Microsoft’s Teams features. During the pandemic, Zoom became a go-to solution for both workers and individual consumers to communicate remotely. Now, video calling is largely reserved for collaborating at work. This places Zoom in a direct competition with Microsoft. Due to its size and resources, Microsoft is likely in a better position to take market share when it comes to collaboration.

 

If the company can navigate these challenges, though, it could still have real potential. Analysts expect growth of about 13.5 percent over the next five years. While far short of Wood’s projections, this slower, steadier rate of growth could allow Zoom to generate returns for its investors over a longer time frame.

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