In this article we discuss the 10 best software stocks to buy according to Cathie Wood. If you want to skip our detailed analysis of Wood‘s history, and hedge fund performance, go directly to the 5 Best Software Stocks to Buy According to Cathie Wood.
Catherine Wood, the founder of New York-based ARK Investment Management, has publicly blamed Tesla, Inc. (NASDAQ: TSLA) chief Elon Musk for the recent crash in prices of cryptocurrency stocks. In a pre-recorded message to a conference recently, Wood, a pioneer in aggressive growth investing who has seen her crypto holdings fall in value by more than 30% since February, said that institutional pressure had forced the Tesla, Inc. (NASDAQ: TSLA) chief to raise environmental concerns related to coin mining earlier this month.
As a result of the concerns raised by Musk, Bitcoin, the most popular crypto currency, lost close to 50% in value over the past few weeks. Other crypto stocks like Square, Inc. (NYSE: SQ) followed too. Tesla, Inc. (NASDAQ: TSLA) later announced that it would suspend Bitcoin payments for vehicle sales, paradoxically sending Tesla, Inc. (NASDAQ: TSLA) share price nose diving as well. Wood, through ARK Investment, owns large holdings in Square, Inc. (NYSE: SQ) and Tesla, Inc. (NASDAQ: TSLA) with a combined worth of over $6 billion.
Amid the chaos around crypto stocks, Wood has turned her attention towards software-related growth stocks in recent months, according to regulatory filings submitted to the US government. ARK Investment has increased stakes in software platforms like Shopify Inc. (NYSE: SHOP), the Canadian ecommerce giant, and Zillow Group, Inc. (NASDAQ: Z), the online real estate marketplace, during the last quarter. Shopify Inc. (NYSE: SHOP) and Zillow Group, Inc. (NASDAQ: Z) now together represent close to 5% of the entire investment portfolio of ARK.
However, Wood is still bullish on the crypto industry, and around growth stocks in particular. According to a report published by American news platform CNBC, Wood has doubled down on her bets on technology stocks in recent weeks as financial experts warn of a bursting tech bubble that saw Wood, whose portfolio is loaded with tech stocks, post over 152% in returns last year. Wood said earlier this week that she was not worried about the threat of inflation that had been disturbing many on Wall Street.
She also added that she actually expected deflation in the context of a breakdown in commodity prices, a gridlock on tax policy in Washington, and several trends which indicated that innovation stocks were set to take off. It remains to be seen whether Wood is right about her outlook on growth stocks like crypto and software, amid a broader lull in the market around technology stocks and increased interest in established sectors like manufacturing and consumer staples. The post-pandemic economy has even left market experts baffled.
The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Cathie Wood of ARK Investment Management
With this context in mind, here is our list of the 10 best software stocks to buy according to Cathie Wood.
Best Software Stocks to Buy According to Cathie Wood
10. Sea Limited (NYSE: SE)
Number of Hedge Fund Holders: 98
Sea Limited (NYSE: SE) is a Singapore-based holding company most famous for running ecommerce platform Shopee. It was founded in 2009 and is placed tenth on our list of 10 best software stocks to buy according to Cathie Wood. Sea stock has offered investors more than 244% in returns over the past year. ARK Investment holds more than 3.1 million shares in the company worth over $707 million, representing 1.4% of their portfolio. Sea has international business interests in digital entertainment and financial services as well.
In earnings results for the first quarter of 2021, posted on May 18, Sea Limited (NYSE: SE) reported earnings per share of -$0.62, missing market predictions by $0.07. The revenue for the first three months of 2021 was $1.8 billion, up 146% year-on-year.
At the end of the first quarter of 2021, 98 hedge funds in the database of Insider Monkey held stakes worth $10.4 billion in Sea Limited (NYSE: SE), down from 115 the preceding quarter worth $10.8 billion.
Just like Square, Inc. (NYSE: SQ), Shopify Inc. (NYSE: SHOP), and Zillow Group, Inc. (NASDAQ: Z), Sea Limited (NYSE: SE) is one of the best software stocks to buy according to Cathie Wood.
“Sea Ltd (SE): When I wrote our Q4 2019 letter about Shopee launching a Brazilian business, it seemed very few investors or competitors knew or cared.
A year ago, I wrote: “This is the first test for the ecommerce marketplace outside of its Southeast Asia home base. Will the platform’s fun and addicting features overcome a lack of local knowledge and presence? It’s hard to predict consumer behavior and how accepting users will be to a platform – especially one that’s a foreign culture and 10,000 miles away. The only way to know is to experiment and watch the results closely.
Empirically though, it seems that what consumers find entertaining in Asia, generally translates well to Brazil (and Shopee really is as much an entertainment platform, as an ecommerce one).
For example, just look at the top 10 free apps in Brazil. Two are utility messaging apps, so we’ll ignore those (WhatsApp and
Facebook Messenger). But among the remaining eight apps, they’re all entertainment based and overwhelmingly Asian. Four are from China (Kwai, TikTok, VStatus, TikTok Lite), two from Singapore (Free Fire and Shopee, both Sea Ltd apps), and one from the US (Instagram). The commonality is that all these apps are experts at creating addictive habits, as evidenced by their personalized recommendations, avg usage time, number of logins per day per user, etc.” (LINK)
I distinctly remember having conversations with several Brazilian hedge funds as recently as last summer who were investors in Sea Ltd. When the topic of Brazil came up, many of them didn’t even know Shopee was operating in their own backyard!
Part of this stems from the fact that Shopee tends to enter markets with a bottoms-up approach. Instead of going after urban, high disposable income users first (of which these hedge fund professionals were certainly part of), they tend to initially go after those with only a few hundred or thousand USD of annual disposable income. These users tend to reside outside of major cities, have fewer choices for recreational pastime (thus turning to gaming, short-form videos, or online shopping for entertainment), can’t afford “branded” items and thus are willing to take a chance on cheaper (but still good quality) un-branded goods, and are willing to wait several weeks for it to be shipped from Asian factories.
Anyone who has studied Pinduoduo (Nasdaq: PDD) in China, will recognize this strategy and just how large of a market these consumers can be. As Shopee gains popularity in a market, they will then start to slowly move “up-market”, and cater to more urban and higher-income consumers. They’ve already followed this exact strategy in Southeast Asia, and this is the point they’ve reached in Brazil over the past year.
Shopee made its first big social push last fall, hiring over a dozen influencers with 1M+ followers to promote Shopee’s Black Friday sale (LINK). In addition, they also released their first Brazilian TV commercial last year.
It seems these initiatives are working. Shopee now consistently ranks in Brazil’s top 5 apps (while sister app Free Fire, is also the #1 grossing app). In addition, Shopee also moved Pine Kyaw (LINK), one of their key lieutenants in Vietnam who successfully helped Shopee fight off competitors (Tiki, Lazada, Sendo), to Brazil last May.
For the past year, the company has insisted publicly that the Brazil initiative is still a “test” initiated by the cross-border team. While this may have been true at first, it’s clear this is no longer a “test”, but rather a strategic focus for Shopee and posed to be the next battleground. It’s likely the company has chosen to remain tight-lipped so as to not tip off competitors, while they quietly “position the troops” to prepare for a larger assault.
For example, Shopee is also starting to allow local sellers to join the platform and list their local inventory (LINK). By definition, this is no longer a cross-border initiative (i.e. allowing their Southeast Asian sellers to sell to Brazilian consumers, and then shipping the goods directly from Asia. This is the model Aliexpress follows.).
This is the start of a localized marketplace. And similar to their early days in Southeast Asia, the goal is to reach the “tipping point” at which the marketplace becomes self-sustainable (this concept is discussed in our Q1 2019 letter; LINK). The weapons of choice in reaching critical mass: social media influencers to drive rust & awareness, free shipping & discounts to acquire / convert these new customers, and gamification of shopping to drive continued engagement, habit building, and repeat purchases.
Given all of this, and the strong (but early) traction in the local Shopee Brazil marketplace, investors need to keep an eye on this development. It is the smallest GMV contribution among Shopee’s countries currently, but a large inherent call option in the valuation. Something that so far, seems greatly underappreciated. I suspect at some point in the near future, Shopee’s management team will disclose more on the initiative, and at which point investors will be surprised by how Shopee managed to quietly build one of the largest marketplaces in Brazil.”
9. Pure Storage, Inc. (NYSE: PSTG)
Number of Hedge Fund Holders: 30
Pure Storage, Inc. (NYSE: PSTG) is a California-based company that provides hardware and software solutions related to data storage management. It was founded in 2009 and is ranked ninth on our list of 10 best software stocks to buy according to Cathie Wood. The company stock has offered investors more than 13% in returns over the course of the past twelve months. ARK Investment owns more than 32 million shares in the data storage firm that are worth over $708 million, representing 1.4% of their portfolio. ARK Investment trimmed their stakes in the firm by 21% in the last quarter.
Pure Storage, Inc. (NYSE: PSTG) posted earnings results for the first three months of 2021 on May 26, reporting earnings per share of -$0.30, beating market estimates by $0.02. The revenue for the period was over $412 million, up more than 12% year-on-year.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm Eminence Capital is a leading shareholder in Pure Storage, Inc. (NYSE: PSTG) with 6 million shares worth more than $130 million.
Just like Square, Inc. (NYSE: SQ), Shopify Inc. (NYSE: SHOP), and Zillow Group, Inc. (NASDAQ: Z), Pure Storage, Inc. (NYSE: PSTG) is one of the best software stocks to buy according to Cathie Wood.
8. Unity Software Inc. (NYSE: U)
Number of Hedge Fund Holders: 39
Unity Software Inc. (NYSE: U) is a California-based software firm founded in 2004. It is placed eighth on our list of 10 best software stocks to buy according to Cathie Wood. The company primarily engages in the development of computer simulations for video game developers. Unity stock has returned more than 6.3% to investors over the past week. ARK Investment owns more than 8 million shares in the software firm worth over $812 million. This represents 1.61% of their portfolio. ARK activity on Unity stock increased by more than 240% in the past months.
On May 12, investment advisory Stifel upgraded Unity Software Inc. (NYSE: U) stock to Buy on the back of strong quarterly revenues for the software firm and the upside potential for expansion in markets like ecommerce and automotive industries.
At the end of the first quarter of 2021, 39 hedge funds in the database of Insider Monkey held stakes worth $6.6 billion in Unity Software Inc. (NYSE: U), up from 32 in the previous quarter worth $11.9 billion.
7. Twilio Inc. (NYSE: TWLO)
Number of Hedge Fund Holders: 99
Twilio Inc. (NYSE: TWLO) is a California-based cloud-based communications firm founded in 2008. It is ranked seventh on our list of 10 best software stocks to buy according to Cathie Wood. Twilio stock has offered investors returns exceeding 76% in the past year. ARK Investment holds more than 2.7 million shares in the firm worth over $932 million. This represents 1.85% of their portfolio. ARK activity on Twilio stock increased by 53% in the past few months, latest data reveals.
In earnings results for the first quarter of 2021, posted on May 5, Twilio Inc. (NYSE: TWLO) reported earnings per share of $0.05, beating market predictions by $0.15. The revenue over the period was more than $589 million, beating market estimates by $56 million.
Out of the hedge funds being tracked by Insider Monkey, California-based investment firm SCGE Management is a leading shareholder in Twilio Inc. (NYSE: TWLO) with 2.7 million shares worth more than $948 million.
Just like Square, Inc. (NYSE: SQ), Shopify Inc. (NYSE: SHOP), and Zillow Group, Inc. (NASDAQ: Z), Twilio Inc. (NYSE: TWLO) is one of the best software stocks to buy according to Cathie Wood.
6. Zoom Video Communications, Inc. (NASDAQ: ZM)
Number of Hedge Fund Holders: 54
Zoom Video Communications, Inc. (NASDAQ: ZM) is a California-based communications technology company founded in 2011. It is placed sixth on our list of 10 best software stocks to buy according to Cathie Wood. Zoom stock has offered 99% in returns to investors over the course of the past twelve months. ARK Investment holds more than 3 million shares in the communications technology firm worth over $964 million, accounts for 1.91% of their portfolio. ARK activity on Zoom stock increased by 215% in the past few months.
On May 19, Zoom Video Communications, Inc. (NASDAQ: ZM) announced the launch of a dedicated events platform that would be used for ticketed communications and video in live events having audiences of any size.
At the end of the first quarter of 2021, 54 hedge funds in the database of Insider Monkey held stakes worth $5.6 billion in Zoom Video Communications, Inc. (NASDAQ: ZM), down from 59 in the previous quarter worth $6 billion.
Just like Square, Inc. (NYSE: SQ), Shopify Inc. (NYSE: SHOP), and Zillow Group, Inc. (NASDAQ: Z), Zoom Video Communications, Inc. (NASDAQ: ZM) is one of the best software stocks to buy according to Cathie Wood.
In its Q4 2020 investor letter, Baron Opportunity Fund, an asset management firm, highlighted a few stocks and Zoom Video Communications, Inc. (NASDAQ: ZM) was one of them. Here is what the fund said:
“Zoom Video Communications, Inc. is a cloud-based software company providing a video-first platform for communication. Shares of Zoom declined during the fourth quarter on profit taking following the strong run in the stock because of accelerated pandemic-driven Zoom adoption, revenue growth, and free cash flow generation. We retain conviction as Zoom remains a leading player in disrupting the $100 billion unified communications market with its scalable, globally distributed, cloud-based, video-first offering, while its well-known brand (Zoom is now a verb!) should enable it to grow profitably as it takes market share.”
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Disclosure: None. 10 Best Software Stocks to Buy According to Cathie Wood is originally published on Insider Monkey.