Cathie Wood’s ARK Innovation ETF has had a rough year. It’s down 14% in 2021 while the benchmark S&P 500 index is up over 20%. But ARK is up a couple of percent year-on-year.
The Covid-19 pandemic created an ideal environment for many ARK companies including video meeting firm Zoom Video Communications (NASDAQ:ZM) and Roku (NASDAQ:ROKU), the digital media player specialist. These are two companies in ARK’s top six holdings that I believe encapsulate the ETF’s struggles this year. Up over 400% and 140% respectively in 2020, this year has seen both share prices come back down to earth. Cathie Wood remains optimistic though, buying the dips of both ‘stay-at-home’ stocks.
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Zoom
Lockdowns gave Zoom the opportunity to accelerate growth beyond its wildest expectations. Last year, Zoom became a household name and even a verb cementing the company as a communications leader. These 2020 catalysts are waning, but Cathie Wood has continued to load up on the stock.
Last week, the company beat expectations on earnings and guidance. Yet following the update, the share price tumbled 15%. Why? Slowing growth in the number of its larger clients (those with more than 10 employees).
This metric grew at a disappointing 18% and suggests slowing growth among its most lucrative customers. This indicator is particularly important when I consider Zoom’s competition. Google and Microsoft have the pricing power to undercut competition such as Zoom. Their videoconferencing products also boast a more versatile and unified offering, attractive to large enterprises.
Zoom is building its own cloud contact centre service following the collapse of its proposed acquisition of Five9. New services like this will determine Zoom’s future growth but it would have benefited from absorbing Five9’s customer base. The acquisition and retention of customers could prove to be costly in the absence of lockdowns and the Five9 deal.
Roku
Like Zoom, the Roku share price took a dive following an earnings report in November. Despite beating on earnings estimates, it missed on revenue expectations. Deceleration in growth was partly blamed on supply chain issues. This impacted TV sales for the quarter, which dipped below pre-pandemic levels. Additionally, YouTube is pulling its apps from Roku. It remains to be seen whether that will dissuade potential customers from buying a Roku.
There are reasons for optimism, however. First Roku have entered the Latin American market. This is a huge opportunity as Brazil and Mexico are seeing huge growth in smart TV penetration. Roku can lean on its experience in the US to drive growth internationally.
Second, connected TV programmatic advertising could revolutionise digital media. Roku can capitalise on this potential boom. I’m particularly interested in its deal with Shopify, providing a lower barrier to entry for streaming TV ads as well as securing more small and medium ad dollars for Roku.
Cathie Wood is buying the dips. Should I?
I certainly see why Cathie Wood remains bullish on both Zoom and Roku, but see too much risk moving forward. It’s hard to argue that either company boasts an economic moat. Zoom is competing against tech behemoths Google, Microsoft and others. Roku is up against streaming, advertising and hardware titans including Amazon, Disney and Netflix. Their lofty valuations also deter me. Zoom’s P/E ratio is over 58 while Roku’s looks is an even bigger 113+. For these reasons, I won’t add shares of either company to my portfolio today.
