It’s no secret that Cathie Wood’s collection of ARK funds have had a horrendous 2022. Her ARKK flagship fund was down 53% year-to-date at the time of writing and traded in the mid-$30s as recently as June, down from a high of almost $100 per share at the start of the year.
But there’s light at the end of the tunnel for growth investors. What savvy growth stock analysts have spotted is in spite of the negative headlines, many top growth stocks appear to have bottomed out. Even on the day the Federal Reserve hiked rates by 0.75%, ARKK rose by 3.75%.
If the market has discounted the downside of Fed rate hikes, as it appears, the time to shop for growth stocks again is coming soon. And in Cathie’s opinion, the time is now. She’s been snapping up these stocks on the dip.
39.7% Upside For Shopify?
Shopify had been a market darling during the 2020-21 period but when the economic tide turned, things got ugly in a hurry. The share price is down an astonishing 75% year to date and the company announced a 10% workforce layoff in response to tougher economic conditions.
What Shopify miscalculated was the degree to which online retailers would suffer in a tighter economic climate with rising inflation. The company’s U-turn could not have been more stark. From a bullish outlook that triggered a 10:1 stock split to layoffs in just a few months is a dramatic twist in the Shopify growth story.
But make no mistake about it, Shopify is still growing, albeit at a slower pace than previously. The problem Shopify faces is revenue growth historically has been almost other worldly:
- 2013: 111.9%
- 2014: 109.0%
- 2015: 95.4%
- 2016: 89.7%
- 2017: 72.9%
- 2018: 59.4%
- 2019: 47.0%
- 2020: 85.6%
- 2021: 57.4.%
What has concerned Wall Street is the slowdown in the pace of quarterly growth. For comparison, 2021 Q1 growth was 110.3% while 2022 Q1 growth decelerated to a modest 21.7%.
So, what is it that Cathie sees to trigger a Buy on Shopify?
When you look at the financial statements and build a cash flow forecast model, it becomes apparent that Shopify is oversold.
The consensus analyst estimate is for the share price to hit fair value at $47.80, representing 39.7% upside from here. That’s a lot of margin of safety and a lot of gain potential. In short, the reward to risk tradeoff for Shopify right now is compelling.
Can Toast Pop 45.2%?
Another Cathie Wood favorite is Toast. Incredibly, Toast is priced close to its initial public offering despite proving it can grow in a tough economic climate.
The past 5 quarters of growth since the company’s IPO have been extraordinary:
- 2021 Q1: 64.0%
- 2021 Q2: 192.5%
- 2021 Q3: 105.4%
- 2021 Q4: 112.4%
- 2022 Q1: 89.7%
Better yet, the payments processing and inventory management platform has lots of upside based on an analysis of its fundamentals.
The consensus estimate pegs Toast fair value 45.2% higher at $21.39 per share. We are a little less optimistic than that because of the risks of inflation hurting dining out trends and the likelihood that consumers will have less discretionary income as gas prices remain elevated. Still, our analysis shows upside potential to $17.14 per share, which would represent a gain of 16.3% from current levels.
Either way the upside is appetizing for Toast, and it seems Cathie Wood agrees.