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3 Bargain Stocks Cathie Wood Loves

In 2020, there was no bigger investing star than ARK portfolio manager Cathie Wood. Her main ARK Innovation ETF (NYSEMKT: ARKK) surged a whopping 156.61% that year, catapulting Wood's status as an expert in the field of disruptive growth stocks.

However, 2021 was not as kind, with the fund down 23.56%. And 2022 isn't looking any better, with the ARKK ETF already down another 10.74% on the year.

After the steep sell-off in growth stocks, investors may want to check out Wood's portfolios for high-quality, beaten-down names that may have been overly punished. Here are three that look especially cheap today, not only compared with the rest of Wood's high-growth portfolios, but on an absolute basis, too.

Image source: Getty Images.

Splunk

IT infrastructure, cybersecurity, and app observability company Splunk (NASDAQ: SPLK) is the 15th largest holding in Wood's ARK Next Generation Internet ETF (NYSEMKT: ARKG). Believe it or not, even though Splunk is a loss-making, high-growth software company, it's actually up in the first two weeks of January. Not many software stocks can say that.

That could be because Splunk had already had a very tough 2021 before the swoon starting in November. The stock is still down 29.2% over the past year and 46.2% down from its all-time highs. Even after the positive start to the year, the stock only trades at 7.7 times sales -- well below the average high-growth SaaS stock.

But Splunk is even cheaper than that. The company is going through multiple transitions, from selling perpetual licenses to subscriptions, as well as moving from deploying its services on-premise at customers into the cloud. Those transitions caused a revenue decline in fiscal 2021, since large one-time sales were replaced by lower but recurring annual or monthly payments. But the company is past the bulk of the transition, so revenue growth turned positive again this year and is now accelerating.

When looking at Splunk's annualized recurring revenue (ARR), which adjusts for its multiple transitions, the $2.83 billion ARR figure is more than 10% higher than Splunk's $2.52 billion trailing-12-month revenue. ARR also grew 37% last quarter, versus only 19% revenue growth. And cloud ARR growth was 75%, much higher than the overall ARR growth rate.

Splunk seems to be past the halfway point of its transition, with 68% of bookings going to the cloud last quarter. As it finishes the transition, revenue should track closer to ARR.

Growth should remain strong as cloud growth makes up a larger portion of overall revenue, and as customers continue to build out more digital infrastructure, all of which needs to be secured and monitored. Accelerating growth and a low valuation are the reasons Splunk was my favorite software stock heading into this year.

Skillz

Video game platform Skillz (NYSE: SKLZ) is in both ARK's core innovation fund and the next-gen internet fund. The company has developed a two-sided platform that allows mobile gamers to play against each other for money or points, and for developers to reach new audiences and monetize their content in a different way.

Skillz went public through a special-purpose acquisition company (SPAC) in December 2020 and climbed to a high of $46.30 before the recent growth stock crash pummeled the stock down to around $6 today. That's below the initial $10 price at which most SPACs raise money.

Sure, Skillz is still losing money -- a lot of money relative to its revenue. Last quarter, adjusted EBITDA margin came in at negative-45.5%. Wall Street has also pretty much thrown out SPACs as an asset class over the past few months, another reason the stock is down so much.

However, the hate may have gone too far. Skillz grew revenue 70% last quarter, and its opportunity remains very large. Mobile gaming was an $86 billion industry as of 2020 and is growing at a double-digit rate.

Last quarter, $611 million in gross marketplace volume (GMV) flowed through Skillz's platform, of which Skillz's revenue take rate was $102 million. That's about a $2.5 billion GMV run-rate and a $410 million revenue run-rate. So the company still has a pretty small market share. And at just a $2.5 billion market cap, Skillz is only trading around 6 times run-rate sales. That seems pretty cheap for a company growing sales 70%, and it's only scratching the surface of its international opportunity. On Jan. 3, Skillz launched a pilot program in India. If it finds success there, that's another 1.4 billion new people who will soon be able to play games on Skillz's platform.

Yes, future profits are a question, but Skillz has a gross margin that exceeds 90%. So if Skillz scales enough, it could be a very profitable company someday. Meanwhile, founder and CEO Andrew Paradise bought $5 million in Skillz stock on the open market in November, at an average price of $11.50. You can buy shares for almost half that price today.

LendingClub

LendingClub (NYSE: LC) is another cheap stock that you can find in the ARK Fintech Innovation ETF (NYSEMKT: ARKF). Like a lot of fintech stocks, LendingClub sold off hard at the end of last year and into January. It appears investors are viewing these stocks more like high-risk tech rather than financials, which have held up better amid concerns over rising rates.

While LendingClub started out as a tech platform connecting personal loan borrowers with yield-seeking investors, it's much more of a bank now, following its February 2021 acquisition of Radius Bank. LendingClub will still be a platform, but it will also retain 15%-25% of its loans on its own balance sheet, backed by the new low-cost deposits that came from Radius.

The change is a big deal. Though LendingClub had similar loan originations last quarter to those of the fourth quarter 2019, it's making much more money.

Metric

Q4 2019

Q3 2021

Originations

$3.1 billion

$3.1 billion

Revenue

$188.5 million

$246.2 million

GAAP net income

$0.2 million

$27.2 million

Data source: LendingClub Q3 presentation.

Yet even that impressive new profitability underrates LendingClub's profit trajectory, as it has to provision for all future charge-offs when it makes a loan, but is paid interest income over three to five years. So if LendingClub is growing originations fast, as it is now, provision costs may be higher than normal.

LendingClub just turned profitable again in the second quarter, so its trailing-12-month profits are still negative, which might be why the stock has been cut in half since mid-November. But investors may be ignoring the fact that LendingClub is now more like a highly profitable bank. Analysts expect next year's earnings per share to come in at $1.73, so LendingClub's stock trades at only 14 times those estimates, making it the rare value stock that's found its way into Cathie Wood's portfolio.

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Billy Duberstein owns LendingClub and Splunk and has the following options: short April 2022 $15 puts on LendingClub, short January 2022 $100 puts on Splunk, short January 2022 $110 puts on Splunk, short January 2022 $18 puts on LendingClub, short January 2022 $21 puts on LendingClub, short January 2022 $85 puts on Splunk, and short March 2022 $60 calls on LendingClub. His clients may own shares of the companies mentioned. The Motley Fool owns and recommends Skillz Inc. and Splunk. The Motley Fool has a disclosure policy.


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