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Cathie Wood Just Bought These 3 Stocks, Should You?
Cristian Docan November 3, 2021
Each of Cathie Wood's investments now attract a lot of attention after the five-star investment manager delivered remarkable returns in 2020. The investment philosophy of her ARK funds is to identify large-scale investment opportunities in the public markets resulting from technological innovations centered around DNA sequencing, robotics, artificial intelligence, energy storage, and blockchain technology.
This year, the performance of ARK funds have mostly lagged the broader market, but recently, Cathie Wood added more shares of three innovative companies that are at the forefront of disrupting their respective industries: Etsy Inc. (ETSY), Okta Inc. (OKTA) and Robinhood (HOOD).
In this article, I will analyze these three companies and identify if they are suitable for retail investors.
Etsy Inc. (ETSY)
ETSY operates two-sided online marketplaces that connect people with buyers and sellers around the world. Its primary marketplace, Etsy.com, is the global destination for creative goods. The company offers a range of tools and services that address key business needs, allowing Etsy sellers to pay for placement of their listings in search results
Since the beginning of the year, ETSY has advanced robustly, up 34.7%, outperforming the Amplify Online Retail ETF (IBUY), which lost 2.4% year-to-date.
Chart from Stock News
ETSY has strong financials with the company's top line growing consistently over the past years and is expected to continue to grow in the 20% range in the next two years, topping a net sales figure of $3.36b in 2023, compared to $2.2b in 2021. ETSY's bottom line has been hit hard by the pandemic after net income dipped 63.6% in 2020 to $349m. Nevertheless, the company's bottom line is now recovering and it is expected to grow by 19.1% in 2022 to $524m and by 38.5% in 2023 to $726m.
On the other hand, ETSY's financial structure has been weighed down by debt this year. ETSY reported a net debt position of $354m this year compared to a net cash position of $553 the previous year. Yet, ETSY is profitable and with its double-digit net margin of nearly 20%, analysts expect the company's net cash position to reach $293m in 2022 and $1.21b in 2023.
In terms of market capitalization, the company trades at high valuation metrics, with a 2022e EV/EBITDA of 40.7x and a massive 2022e P/E ratio of 71.5x.
Okta Inc. (OKTA)
Okta, Inc. is specialized in the development and marketing of corporate identity management software. The company operates the Okta Identity Cloud platform that enables authentication and data security for IT organizations and web developers.
Investors in OKTA have been disappointed this year, as the stock performance of the data security company declined slightly, down .27%, and has underperformed its benchmark the Vanguard Information Technology ETF (VGT), which gained 24.4% since the beginning of the year.
The company's revenues have grown significantly in the past years and are estimated to continue to grow rapidly, posting a yearly expansion of nearly 40% in the next three years, up 49.6% to $1.24b in 2022, and up 37.6% to $1.71b in 2023.
On the other hand, OKTA has struggled to deliver a profit in the past years and its bottom line is expected to weaken in the next few years. Indeed, with a net loss of $266m this year, the consensus of analysts anticipates a net loss of $758m in 2022 which should slightly decelerate to $715m in 2023.
With these poor bottom-line figures, the company's financial structure is under pressure. While OKTA's cash position increased significantly, up 69.9% to $790m it should decrease moderately in 2022, down 11.5% year-on-year to $699m. However, OKTA raised capital this year by issuing new shares, explaining the comfortable cash position of the company.
At its current price, the data security specialist appears to have overvalued metrics, as the company trades at a 2022e P/B ratio of 6.28x and a 2022e EV/Revenue of 30x.
Robinhood (HOOD)
HOOD develops a financial services platform principally focused on developing applications for cash management such as stocks, exchange-traded funds, options, and cryptocurrency. Its platform also offers trading in the United States (U.S), enabling its customers to access listed stocks, exchange-traded funds (ETFs), options, American depositary receipts (ADRs), and cryptocurrencies.
Over the past 3 months, HOOD shares have declined about 20%.
HOOD's bearish momentum has been amplified by the company's huge third-quarter revenue miss. On October 26th, HOOD reported that its revenue fell to $365m from $565m in 2Q2021, while the company's net loss of $2.06 per share was greater than analysts' average expectation of a loss of $1.37 per share. Moreover, order flow revenue, defined as revenue earned from selling customers' trades to Wall Street's high-speed trading firms, was down 41% quarter-on-quarter to $267m.
These unexpected results have created an opportunity for investors looking to play this disruptive fintech company. It's important to note that HOOD's net sales are expected to expand rapidly in the next two years, up 30.9% to $2.36b in 2022 and up 30.4% to $3.08b in 2023. On the other hand, the fintech company is projected to reach profitability in 2023. After its massive loss registered in 2021 which reached $3.5b, HOOD is estimated to reduce losses significantly in 2022, down to $256m.
In addition, HOOD's balance sheet is healthy, as the company has a net cash position of $1.08b, which should allow them to continue its operations without raising debt or issuing new shares in the medium term. Moreover, the company's free cash flow is estimated to accelerate, up 47.4% year-to-date to $858m in 2022 and by 29.7% to $1.11b in 2023.
Cathie Wood is not afraid to invest in volatile and disruptive companies that could be big winners in the long term. While ETSY, OKTA, and HOOD are all well-positioned to transform their respective industries, I believe that only HOOD is a buying opportunity for retail investors.
My reasons being HOOD provides an interesting risk/reward ratio and its latest earning miss has created an opening for investors not yet exposed to this fast-growth fintech.
While Cathie Wood added new shares of OKTA and ETSY, I believe these two stocks are too expensive at the moment and their high growth rate is likely to slow in the near term, which will create better entry points for retail investors.
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Cristian Docan
Cristian is an experienced investment analyst and financial writer. Prior to Wealthpop.com, Cristian spent three years as a consultant providing investment research and content to financial services companies and online publications on the Oil & Gas sector. Cristian enjoys researching and writing about stocks and the markets. He takes a fundamental, technical and quantitative approach in evaluating stocks for readers. Previously, Cristian was Power Portfolio Manager at Engie Global Markets. Cristian started his career in portfolio management at Société Privée de Gestion de Patrimoine, an independent wealth management firm. He received a Bachelor Degree in Economics and Management at Université Panthéon-Assas University and a Master of Science in Financial Markets at INSEEC Business School.
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