In this article, we discuss Cathie Wood’s top 5 stock picks. For Wood’s comments on the monetary policy, crypto space, EVs, and her investment philosophy, read Cathie Wood’s Top 10 Stock Picks.
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind, here are Cathie Wood’s top 5 stock picks:
Cathie Wood of ARK Investment Management
5. Square, Inc. (NYSE: SQ)
Value: $1,541,416,000
Change in Position Size: 21%
Percent of Cathie Wood’s 13F Portfolio: 4.1%
Founded in 2009 by Twitter CEO Jack Dorsey, mobile payments company Square has grown to become a $99 billion market cap company. The stock has gained about 200% over the last 12 months. But Cathie Wood is bullish that Square will keep getting bigger.
Last month, she tweeted:
“#Square business model illustrates that vertical integration can create moats, or barriers to entry, and deliver superior financial results.”
Square recently said it will buy a majority stake in rapper Jay Z’s music streaming service Tidal by paying $297 million in cash and stock.
According to our database, the number of Square’s long hedge funds positions increased at the end of the fourth quarter of 2020. 89 funds hold a Square Inc. position compared to 73 funds in the third quarter. The company’s most significant stakeholder is ARK, with 7.08 million shares worth $1.5 billion.
4. Teladoc Health, Inc. (NYSE: TDOC)
Value: $1,566,153,000
Change in Position Size: 289%
Percent of Cathie Wood’s 13F Portfolio: 4.2%
Texas-based Teladoc Health is operating in the lucrative telemedicine market that is poised to grow, especially after the coronavirus crisis, as people and doctors are starting to prefer treatment discussions remotely to avoid costs, health risks and time consumption. Teledoc bills itself as a software company, with a variety of platforms, video conferencing and teleconferencing tools to connect patients and doctors. The company also has a team of doctors who treat patients with minor diseases remotely.
As of the end of the fourth quarter, 50 hedge funds in Insider Monkey’s database of 887 funds held stakes in Teladoc, compared to 47 funds in the third quarter. Cathie Wood’s ARK Investment Management is the company’s biggest stakeholder, with 7.8 million shares worth $1.6 billion.
3. CRISPR Therapeutics AG (NASDAQ: CRSP)
Value: $1,594,331,000
Change in Position Size: 23%
Percent of Cathie Wood’s 13F Portfolio: 4.2%
Crispr Therapeutics is a Swiss company which is working on technologies to make genome editing easier and faster. The company’s CRISPR-Cas9 is based on RNA-guided targeting. The technology can modify DNA with greater precision as compared to the existing solutions in the market. The stock is one of the top holdings of Cathie Wood’s ARK Innovation ETF (NYSEARCA:ARKK) as the fund is betting that the shares of the biotech company will post big gains as early as 2021.
As of the end of the fourth quarter, there were 34 hedge funds in Insider Monkey’s database that held stakes in CRISPR Therapeutics, compared to 26 funds in the third quarter. ARK is the company’s biggest stakeholder, with 10.4 million shares worth $1.6 billion.
2. Roku, Inc. (NASDAQ: ROKU)
Value: $1,785,212,000
Change in Position Size: 36%
Percent of Cathie Wood’s 13F Portfolio: 4.8%
California-based Roku ranks 2nd on the list of Cathie Wood’s top 10 stock picks. The media company in January said that its total subscriber count stands at 51.2 million, up by 14 million accounts in 2020. Roku’s platform saw about 17 billion streaming hours in the fourth quarter, a 55% increase on a year-over-year basis. Roku recently signed a deal to acquire Nielsen’s video ads business. Investment firm Susquehanna, which is bullish on Roku, said that the deal will help the media company with dynamic ad insertion. It has a price target of $530 for Roku.
With a $1.8 billion stake in Roku Inc., ARK owns 5.4 million shares of the company as of the end of the fourth quarter of 2020. Our database shows that 60 hedge funds held stakes in ROKU at the end of the fourth quarter, versus 59 funds at the end of the third quarter.
Saga Partners, in their Q4 2020 Investor Letter, said that Roku, Inc. (NASDAQ: ROKU) is one of the most attractive opportunities they currently own.
Here is what Saga Partners has to say about Roku, Inc. in their Q4 2020 investor letter:
“Roku has been on my radar since its 2017 IPO given our significant investment in The Trade Desk. While I admired the company from afar, I never was comfortable with how it would successfully compete with the tech giants, particularly Amazon’s Fire TV, Google’s Chromecast, Apple TV, and to a lesser extent, the large TV manufacturers (OEMs) such as Samsung and LG trying to build their own TV operating systems. I also did not quite grasp Roku’s competitive position in the advertising value chain relative to the Trade Desk. Would Roku, being another middleman in the advertising/content value chain, be able to earn attractive profits with The Trade Desk in the power position?
I watched from the sidelines as Roku’s market share in streaming devices and TV operating systems continued rise. Roku has since increasingly become the default operating systems for TV and the largest aggregator of third-party TV streaming content in North America based on streaming hours with its 51 million active accounts. It has the largest market share of smart TVs in North America with 38% in the US and 31% in Canada. 49% of all programmatic connected TV ads go to Roku devices. When COVID opened the floodgates for the inevitable consumer and advertiser adoption of connected TV, I sharpened my pencil to better understand the dynamics that seemed to continue to play in Roku’s favor.
Roku is winning market share from Google for a few reasons. Google has not made strong inroads in TV operating systems with OEMs for the same reason that Microsoft could not transition its dominance in the personal computer operating system to the mobile phone operating system. They were trying to reconfigure an operating system that was built for a completely different product, thereby making it less effective than if starting from scratch. Google’s Android TV is primarily a phone platform that was stripped down to create a TV version. TV manufacturing is very price competitive. Google’s stripped-down mobile operating system for a TV has a higher cost structure and puts them at a price disadvantage to Roku which has been purpose built for TV from the ground up. The lower cost of materials required to run the Roku OS enables TV brand license partners to build more competitively priced products.
Amazon and Apple have also faced difficulties. Amazon has been successful in selling Fire Sticks but has not gained a lot of traction in licensing their TV operating system to OEMs. This is largely because retailers (most notably Walmart a significant seller of TVs) view Amazon as a direct competitor and do not want to carry Amazon consumer electronic products. The Apple TV is now a distant fourth in terms of streaming player unit sales. Apple has traditionally been resistant to licensing their operating system and has gone to market with a premium hardware product and therefore has not made a lot of inroads in TV.
Most TV OEMs are beginning to license an operating system from a company such as Roku. However, there are TV OEMs such as Samsung and LG trying to build their own TV OS. Despite having sizeable TV sale market shares both have been facing consumer adoption headwinds. One reason is that TV OEMs historical core competency has been designing and manufacturing tangible products. Like what happened with mobile phone OEMs when the Android mobile operating system came out, it’s difficult for an OEM to also focus on writing software to build a proprietary OS that competes with a company whose only focus is licensing its software. Additionally, there is a benefit to being TV OEM agnostic and therefore being available on any potential TV.
Roku is experiencing the operating system virtuous cycle; as Roku enters more households, it collects more data on viewers which helps advertisers target viewers, drawing in more content that can access users and monetize via ads better on Roku, which provides more content and better viewer experience, repeat. Increasingly, people will prefer TVs that come with a Roku OS because they will have the best consumer experience which then motivates more OEMs to license the Roku OS.
Whoever controls the TV operating system is going to be in a powerful position in the TV value chain. Before streaming, the legacy cable operator was in that power position, controlling distribution and the direct-to-consumer relationship. With the power of the Internet, Roku increasingly looks like the dominant company that is aggregating consumer demand, controlling the direct-to-consumer relationships, and displacing the legacy cable company position in the value chain.
Connected TV is a much better experience for both consumers and advertisers. Viewers can watch what they want when they want, and advertisers are better able to target viewers with the data Roku can collect. While cable operators monetize by collecting money each month from the consumer and then slicing it up among different content providers, Roku monetizes by taking a piece of the advertising, transactions, and subscriptions that occur over their platform.
The next question was what Roku’s relationship would eventually look like relative to a potentially powerful player like The Trade Desk. As I’ve discussed many times in the past, The Trade Desk will eventually be the ultimate aggregator of advertising demand, helping allocate ad dollars across the global supply of ad inventory. They own the customer relationship (the advertiser) and are able to aggregate the highly fragmented supply of ad inventory around the world. The Trade Desk helps advertisers make the best return on their ad dollar based on their specific needs.
In the advertising sense, Roku will technically be a supplier of inventory as they help content owners monetize via advertising. As it becomes increasingly evident that Roku is winning as the TV operating system, they will still be in a power position for any advertiser that wants to monetize via TV, which has historically been a significant share of total ad dollars.
This may be a controversial comment for all the Netflix bulls out there, but I expect that at end state, content owners will increasingly be commoditized, Roku will be a powerful aggregator of TV viewers, and The Trade Desk will be an even more powerful aggregator of total advertising dollars. There’s still a lot of steps before this dynamic unfolds and I will be watching closely. Companies like Netflix and Disney will likely continue to be powerful content owners because of the supply side economies of scale, but I suspect will lose their direct-to-consumer advantage. Subscription content services like Netflix will eventually try to monetize their content via advertising as paid subscription growth slows which they will then have to share with whoever owns the TV operating system direct-to-consumer relationship. No single company, not even Netflix, will be able to control/own the entire world’s supply of TV content; and viewers will want help filtering all of the increasingly accessible content on demand.
The Trade Desk will be in the power position to allocate ad dollars to Roku based on the attractive ROI to advertise on TV. Advertisers will still go straight to The Trade Desk because only The Trade Desk will be able to compare the entire universe of available ad inventory on their platform. Advertisers will want to know what the ROI is on Spotify vs. Google vs. Roku vs. any other place to advertise in the world. Roku will never turn down demand from the Trade Desk since it will likely be a material amount of ad spend. If advertisers only want to advertise on TV, they will be able to bypass The Trade Desk and go straight to Roku; however, they will likely earn lower ROIs on their spend since similar ads can be sent outside of TV and only the Trade Desk will be able to provide the data/analytics on the most effective places to show those ads. Owning demand is a powerful place to be in the internet economy.”
1. Tesla, Inc. (NASDAQ: TSLA)
Value: $2,917,399,000
Change in Position Size: 21%
Percent of Cathie Wood’s 13F Portfolio: 7.8%
Tesla ranks 1st in our list of Cathie Wood’s top 10 stock picks. Tesla shares have gained 341% over the last 12 months but the stock is under pressure amid a broader decline in EV stocks. But some analysts believe that the recent selloff is a buying opportunity. Wedbush analysts Daniel Ives and Strecker Backe said in a note that the latest EV selloff is caused by the risk aversive mood in the market and soft sales reports coming from China. The analysts said that the EV “party” is just getting started.
As of the end of the fourth quarter, 68 hedge funds in Insider Monkey’s database of 887 funds held stakes in Tesla Inc., compared to 67 funds in the third quarter. Cathie Wood’s ARK Investment Management is the company’s most significant stakeholder, with 4.1 million shares worth $2.9 billion.
Bireme Capital, in their Q4 2020 Investor Letter, said that they are short Tesla, Inc. (NASDAQ: TSLA). Bireme Capital stated that Tesla may have the most unrealistic expectations among the companies they treat as great contenders.
Here is what Bireme Capital has to say about Tesla, Inc. in their Q4 2020 investor letter:
“Of all the contenders, Tesla may have the most unrealistic expectations. Now Tesla inarguably deserves a ton of credit for driving forward the frontiers of electric vehicles, car design, and consumer adoption of autonomous driving. However, as we said in Part I, “There’s a difference between a great company and a great investment.”
Tesla’s worldwide market share is only about 1%, but its market cap is higher than the nine largest car companies combined. Growing into this market cap is going to be impossible. Bending metal just isn’t that good of a business: car manufacturers generally earn single-digit net margins. Hopes of recurring high-margin revenue from software sales and robotaxis are pipe dreams — in a third-party ranking, Tesla’s much-ballyhooed autonomous driving system recently came in dead last out of 18
competitors.Tesla did eke out a profit for the first time this year, but only because of $1.5b in pure-margin revenue from sales of automotive regulatory credits to other car manufacturers that did not meet emissions standards. This pure-margin revenue will disappear shortly as competing EVs enter the market. Nearly a hundred EV models are set to debut in the next few years, from large and established industry players like Ford, Toyota and GM, as well as upstarts like NIO, Fisker, Lucid, Rivian, and many, many others.
Tesla does have a market share lead in the EV market, but we find it hard to believe that the technology lead is insurmountable — Tesla’s latest annual report revealed that it spent more on bitcoin than on research and development. (We would be remiss not to mention the incongruity of a company focused on sustainability buying bitcoin, the energy-intensive mining of which produces more greenhouse gases than many medium-sized countries.)
We suspect that for many stockholders a share of Tesla is more of a collectible than an investment. Jim Cramer recently tried to explain Tesla’s astonishing stock gains (up 13x in the past two years). He said, “The analysts couldn’t understand that Tesla is more than just a vehicle. It’s a vehicle of hope in a miasma of gloom.” That may be true, but if you are looking for a solid investment rather than a manifestation of optimism, we suggest you look elsewhere.
We are short Tesla.”
You can also take a peek at Chuck Akre’s Top 10 Stock Holdings and Billionaire Mario Gabelli’s Top 10 Stock Picks.
