Fostering innovation is central to Cathie Wood's investment style. It hasn't always been a winning strategy – as evidenced by the disappointing performance of her Ark Invest fund over the past year – but her belief in the potential of disruptors has never faltered, even in the face of negative market movements. This year, however, sticking with what she believes has paid off. Her Ark Invest fund's flagship ETF, the Ark Innovation ETF, is up 40% year-to-date.
However, some of the names that are part of the ETF have underperformed recently, and apparently Wood thinks now is the time to add to the stock.
Known for fearlessly going where others might hesitate, Wood has increased her stakes in two innovative stocks that have been lagging behind lately. We ran these tickers through the TipRanks database to get a sense of current sentiment on Wall Street towards these names. Here are the facts.
PagerDuty, Inc. (PD)
The first Wood-backed company we'll be reaching out to is PagerDuty, an American cloud computing company that offers a platform for digital operations management. It aims to help organizations' IT departments manage and respond to critical incidents in real time.
PagerDuty is recognized as an innovator in Incident Management and Digital Ops. The company has been instrumental in revolutionizing the way businesses deal with critical incidents and ensure the reliability of their digital services. PagerDuty introduced a novel approach to incident response by providing a centralized platform that integrates with a wide range of monitoring tools and facilitates seamless collaboration between teams.
Demand for the products has obviously increased as revenue has steadily increased over the past few years. This was also the case in the recently released report on the first quarter of fiscal year 2024 (April quarter). Revenue rose 21% year over year to $103.2 million, slightly beating consensus estimates. Additionally, adjusted earnings per share of $0.20 beat guidance of $0.09.
So far, so good. However, the prospects were not as good as hoped. In fact, the company expects its second-quarter revenue estimate to fall short of Street's guidance, and for fiscal 2024 revenue to be in the range of $425-$430 million, below the previous range of 446-452 million US dollars.
Shares then cratered, falling 38% from April's 52-week high. In the meantime, Wood has been busy picking up some shares cheaply. This month, she bought 971,668 PD shares through the ARKK fund. In total, ARKK now holds 7,954,868 shares, currently valued at $172.54 million.
Morgan Stanley analyst Sanjit Singh also remains bullish, although he concedes the growth outlook is less than ideal.
“As management continues to execute on its major efficiency initiative, this is reflected in the fact that Q1 operating/FCF margin was well ahead of expectations of 16%/20% and FY24 operating margin guidance of 8-9 % was increased to 11-12%. Previously, growth prospects were disappointing,” wrote Singh. “Given an attractive valuation of 5.5x CY24 Revenue and ~21 CY24 FCF, we remain Overweight which we believe undervalues a cloud software asset that delivers 85% gross margin, over 90% gross retention and is on a accelerated path is located at 20%. + Operating and FCF margins through FY25.”
This overweight (i.e., Buy) stance is backed by a price target of $35, which means the shares have room for about 61% growth over the year. (To see Singh's track record click here)
In total, eight analysts have recently covered PD ratings, split into five “buy” and three “hold” ratings, all culminating in a moderate buy consensus rating. The median price target of $30.57 suggests shares will climb about 41% in the coming months. (See PD Stock Forecast)
Teladoc health (TDOC)
For the next innovative name to be praised by Wood, he will turn to a healthcare disruptor. Teladoc is a leading player in telemedicine, revolutionizing the accessibility of healthcare. Leveraging technology, individuals can conveniently access medical care remotely through its services, eliminating time-consuming clinic waits, high fees and appointment complications.
Such a value proposition proved particularly beneficial during the Covid-19 pandemic, and Teladoc's stock benefited immensely from that development.
Since then, however, the situation has deteriorated somewhat, as growth has steadily slowed down in recent years and the company has still not been able to turn a profit.
Nonetheless, Teladoc still beat expectations in its most recently released Q1 2023 report. Revenue rose 11.3% year over year to $629.24 million, beating analysts' forecast by $11 million. While Teladoc regularly posts losses, earnings per share came in at -$0.42, up $0.08 on expectations. Also, Q2'23 revenue guidance was strong, expected to be between $635 million and $660 million versus consensus at $642.72 million.
Investors generally liked the results, but the overall trend in stocks has been negative since a rally earlier in the year; Since peaking in February, the stock is down 26%. Still, during this period, Wood showed confidence in Teladoc's prospects; In the past three months, she has purchased 966,120 shares through the ARKK fund. ARKK's total holdings now stand at 11,917,893 shares. At the current market price, these are worth around 286 million.
Canaccord analyst Richard Close also supports the company's opportunity and sees room for outperformance, calling Teladoc's low valuation attractive.
“The company appears to remain conservative in its forecasts, which could point to future upside surprises provided the stable sales environment in both the B2B Integrated Care and D2C BetterHelp spaces continues,” said the 5-star analyst. “The Company expressed confidence in meeting its annual guidance targets given that the late-stage Integrated Care pipeline has increased significantly compared to last year when the extended chronic care sales cycle occurred and the cost of acquiring customers from BetterHelp stay stable.”
“Given the very low valuation, we believe downside risk is minimal and further implementation of conservative guidance should result in decent appreciation from current levels. One thing remains clear: Teladoc is the best positioned company to capitalize on the continued adoption and adoption of digital health,” added Close.
These comments form the basis of Close's buy rating and price target of $36. This suggests shares are poised to surge 50.5% in the coming months. (To view Close's track record, click here)
Elsewhere on the stock market, the stock receives another 5 buys and 11 break points, making the analyst consensus a moderate Buy. The forecast calls for a one-year gain of 30% assuming the average target is $31.06. (See TDOC Stock Forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is very important to do your own analysis before investing.