Catherine Wood (Trades, Portfolio)'s Ark Invest is fresh off a horrid year, with many of its innovation-focused funds now down more than 70% from their all-time highs. Despite the beating her funds took, Wood is continuing to take advantage of the plunge in tech stocks, adding to stakes in various growth names that the broader market has thrown in the towel on.
Undoubtedly, the rise and fall of Ark's funds shows that chasing hot stocks is a dangerous game. Now that the script has flipped and few folks out there want to touch the former high-flying tech plays, I don't think it's all too far-fetched to view innovation stocks (even those of some companies that aren't yet making a profit) as the new value plays.
Indeed, rate hikes are still coming in. Higher interest rates make debt more expensive, and they are typically implemented due to high inflation, which makes future earnings less valuable. With the failure of Silicon Valley Bank (SIVB, Financial) in the books, it will also get tougher for tech companies with cash flow issues to find funding for expensive projects. Budget cuts, layoffs and all the sort have hurt your average startup.
As the macro climate continues to beat them down, though, I think we will eventually reach a point where the punishment is overdone. Now, it's impossible to tell if the broader basket of tech innovators has already fallen below where they should be. Regardless, those looking to buy the crash in innovative tech should be careful because, as we learned in 2022, buying the dip in hopes of a quick gain could lead to nothing but pain.
True to the investing strategies she has always preached, Wood still sounds upbeat on innovation stocks. She even believes that deflation may follow the recent wave of inflation, giving the Federal Reserve room to cut rates at some point next year. Even as Fed Chairman Jerome Powell maintains his hawkish tone, we are closer to the end of the rate-hike cycle than just a year ago. If we are, innovative tech may finally have the legs to climb out of the hole again after falling hard.
This past January saw tech begin to flex its muscles again, but the relief rally was short-lived. With innovative names in the gutter again, I do think brave investors like Wood can improve their return prospects with companies that still have sound growth strategies and a means to gradually transition into profitability in the future.
Not all tech innovators will break into a sustained profit. Some will keep imploding under pressure or succumb to competitors. However, two of Wood's recent bets have caught my attention as they still seem fundamentally sound: Microsoft (MSFT, Financial) and Roblox (RBLX, Financial).
Microsoft: A mega-cap tech titan
I would never have thought Wood would have bought shares of Microsoft (MSFT, Financial) for any of her Ark funds. Yet, on Monday, Wood reportedly scooped up around $11 million worth of Microsoft stock (just shy of 41,000 shares) for the Ark Next Generation Internet ETF (ARKW, Financial), according to Ark's daily trading data (which you can find on its website).
Her vote of confidence is a testament to the kind of innovation the $2 trillion behemoth is still capable of. Arguably, Microsoft has been out-innovating its smaller peers in recent years. Many innovation investors have taken notice, including Wood, who's not known to be keen on the mega caps.
With OpenAI, ChatGPT and Bing hogging the headlines, Microsoft stock has become the go-to mega cap to hop on the artificial intelligence (AI) bandwagon. Unlike small-cap tech innovators, Microsoft has plenty of cash to sink into AI efforts, not to mention the ability to upsell many of its existing software users as it looks to monetize generative AI technologies.
According to Credit Suisse (CS, Financial), a European bank that got into hot water last week, Microsoft could land $40 billion in sales over the next five years thanks to its involvement with ChatGPT. That's a rough estimate, but one that I believe is too conservative given the disruptive capabilities of AI.
Simply put, Microsoft is still quite agile and profoundly disruptive despite its size. Otherwise, the stock wouldn't find its way into an Ark ETF.
Roblox: Still aiming for the Metaverse
Around a month ago, Wood snapped up $7.2 million worth of Roblox shares. Roblox is in a world of pain right now, with its share price down around 67% from its 2021 peak. Roblox has come under even more pressure as it disclosed its exposure to Silicon Valley Bank, with around 5% of its cash in the failed bank.
Looking further out, Roblox still has its sights on the Metaverse. Jefferies (JEF, Financial) recently upgraded the name, citing the company's "favorable narrative" and the likelihood that margins have reached some sort of "infection point."
I believe many investors have overlooked Roblox's narrative amid rate hikes and vast negative momentum for unprofitable growth stocks. The company is still investing in its future. Even with recession headwinds and higher interest rates in the way, Roblox looks well-equipped to keep doing what it does best — innovating.
The Metaverse may still be a ways off from becoming truly popular, but it's hard to argue that Roblox is still one of the more innovative names in the high-tech basket. Trading around 11 times sales, Roblox stock stands out to me as a GARP (growth at a reasonable price) stock among the wreckage.
Final thoughts
Wood's results haven't been great as of late, which is understandable as the current market environment is decidedly against tech and growth in general. But she has been busy buying the dip, and her investment thesis seems little changed, which inspires confidence. Microsoft and Roblox are two recent purchases from Wood that I view as intriguing at these price levels.
