3 Cathie Wood Stocks to Buy and Hold for 5 Years | The Motley Fool (2024)

Cathie Wood's strategy of buying emerging growth tech stocks served her well before 2021. However, the bear market has led to a 69% decline in the flagship Ark Innovation ETFover the last year.

Nonetheless, this fund had outperformed the market before the downturn. As more Cathie Wood investments make a likely recovery, Block (SQ -1.32%), Roku (ROKU -1.04%), and Zoom Video Communications (ZM -1.93%) will probably drive a significant portion of the returns.

1. Block

Block is approximately 5% of Cathie Wood's Ark Innovation ETF. Wood has enthusiastically supported its co-founder, Jack Dorsey. His support for Bitcoin and developing blockchain technologies drew her backing.

Although blockchain will likely become a permanent fixture in the financial system, Block's seller ecosystem is also compelling. In the U.S., its dual role as both a traditional bank and a fintech for business customers gives it a competitive advantage. It has also moved slowly to expand that ecosystem within the developed world, as it now serves eight countries.

Moreover, its Cash App social payments platform has emerged as the principal competitor to PayPal's Venmo. Wood chose Block over PayPal due to its Bitcoin trading capabilities, though Venmo has since added cryptocurrency options.

Such applications led to $1.3 billion in gross profit for the first quarter of 2022. That rose 34% compared with the year-ago quarter. Still, since the company invested heavily in itself, operating expenses surged by 70%. This led to a net loss in Q1 of $204 million versus a $39 million profit in the same quarter last year.

Also, amid the tech bear market, Block's stock price has fallen over 75% from its 52-week high. Nonetheless, with its price-to-sales (P/S) ratio at 2.1, the lowest level in six years, further significant drops in the stock seem less likely.

2. Roku

Cathie Wood has made Roku her second-largest position in the Ark Innovation ETF, at around 8%. She believes the stock price can rise to an estimated $605 per share by 2026, with bear and bull cases ranging from $100 per share to $1,493 per share, respectively.

Roku earned $2.8 billion in revenue in 2021. But looking forward, her base case calls for $14.4 billion in revenue by 2026 as video advertising, content distribution, display advertising, and content revenue grow exponentially. During this time, she also believes that accounts will rise to 157 million versus about 61 million today. This will occur as TV ad revenue transitions from traditional television to streaming.

Still, Roku's growth has slowed somewhat amid the end of lockdowns. Q1 revenue came in at $734 million, 28% higher than year-ago levels but below the 51% growth in 2021. Also, fast-rising operating costs led to a $26 million loss for the quarter compared with $76 million in income in the first quarter of 2021.

However, its stock has fallen by over 80% from the 52-week high. Also, its P/S ratio stands at 4.1, a low it has not seen since soon after the 2017 IPO. If Roku can significantly exceed the expectation of Wood's bear case, it should lead to outsized returns over time.

3. Zoom Video Communications

Wood believes Zoom is more than a pandemic flash in the pan. Not only has she made it Ark Innovation's largest holding, at more than 8%, but she also has forecasted an average price target of $1,500 per share by 2026, a 14-fold increase. And even the bearish case of $700 per share would take Zoom past its 2020 high of $589 per share.

Even as many workers return to the office, the remote work trend will likely not disappear. Many workers will assume a hybrid work model that involves part-time remote work, while others will go 100% remote.

Ark believes this can take the number of paying Zoom users from 2021 levels of 36 million to between 90 million and 180 million by 2026. This dynamic would bring revenue from $4 billion in 2021 to between $30 billion and $70 billion over the same period. Also, Datanyze estimated a 75% market share in the online meetings segment for Zoom, a level of dominance that should bolster these trends.

Admittedly, the forecasted move may take time to play out. In its fiscal first quarter of 2023 (which ended April 30), revenue of almost $1.1 billion grew by 12% year over year. Also, massive growth in operating expenses and investment losses reduced net income by 50% to $114 million over the same time frame.

However, those rising expenses were investments in itself that should pay off later. Also, its P/E ratio has fallen to 25.7, a level near all-time lows. Considering its dominant market share and potential for growth, Zoom looks like a top growth stock to buy now, even if a more bearish scenario comes to pass.