Renowned investor Cathie Wood has made her name by betting against market trends. With more than $50 billion in assets under management (AUM), Wood can afford to sustain short-term losses in pursuit of big long-term gains. In contrarian investing, it often takes considerable time for an investment to deliver a desired return on investment. However, retail investors with limited access to capital might be forced to exit their positions in the short run and thus register losses on such bets.
With the U.S. economy making a faster-than-anticipated recovery, some of the most profitable stocks that gained on account of the COVID-19 pandemic have been witnessing a decline in revenues and earnings. Their share prices are declining too. While major billion-dollar businesses have witnessed a short-term pullback amid the impending economic recovery, they are expected to recover once markets stabilize post-pandemic. However, we think investors with limited funds should avoid investing in such stocks in April.
Thus, retail investors with relatively low risk tolerance should avoid Cathie Wood’s top picks Shopify Inc. (SHOP), Spotify Technology S.A. (SPOT) and Zillow Group, Inc. (Z), given these stocks’ weak near-term prospects of these stocks.
Shopify Inc. (SHOP)
Canadian e-commerce giant SHOP is a holding in Wood’s Ark Innovation ETF (ARKK). ARKK is one of the most profitable ETFs managed by Ark Investments and holds approximately 657,450 shares of SHOP in its portfolio, representing a 3.3% weighting . SHOP has a weighted rank of #7 in ARKK, and a weighted rank of #6 across all Ark funds. The ETF has been buying shares of SHOP over the past six months. Ark Investments has a 0.59% stake in the company.
It should be noted, however, that SHOP’s impressive performance over the last year can be accredited to the pandemic’s tailwinds to the e-commerce industry. As the global economy recuperates from nearly a year of fragmented lockdowns and social distancing policies, consumers are likely to resume shopping at brick-and-mortar retail outlets. And as the vaccination drive picks up pace in the United States and Canada, SHOP’s revenues are expected to decline temporarily in the second quarter as outdoor activities rise. While the advantages of e-commerce shopping are expected to help SHOP retain its growth trajectory in the long run, the stock is expected to witness a temporary pullback this month.
SHOP’s revenues increased 94% year-over-year to $977.70 million in the fourth quarter ended December 31, 2020. However, the company’s cost of revenues increased 96.2% year-over-year to $504.39 million. This is because the cost of revenues from its “Merchant Solutions” segment more than doubled over this period. Its total operating income rose 33.3% from its year-ago value to $391.85 million. Also, the company’s total deferred revenues increased significantly in its fiscal year 2020.
Analysts expect SHOP’s EPS to decline 17.1% in the current quarter (ending June 2021), and marginally in its fiscal year 2021. The consensus revenue estimate of $4.08 billion represents a 39.4% improvement year-over-year. SHOP has gained 177.5% over the past year, and 9.7% year-to-date.
SHOP has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
SHOP has an F grade for Value, and D for Stability. It is ranked #28 of 43 stocks in the D-rated Internet – Services industry. In total, we rate SHOP on eight different levels. Beyond what we’ve stated above, one can check out the additional POWR Ratings for Momentum, Sentiment, Growth and Quality here.
There are nine stocks in the Internet – Services industry with an overall rating of A or B. Click here to view them.
Spotify Technology S.A. (SPOT)
As one of the leading names in the global music and streaming industry, SPOT caught Wood’s attention last September. She began purchasing the stock to be included in two of her most popular ETFs, ARKK and Ark Next Generation Internet ETF (ARKW). However, following the release of the company’s financial reports for fiscal 2020, Wood has been selling SPOT shares. She has sold 302,407 shares of SPOT since March. She currently holds approximately 3.60 million shares of SPOT, having a combined weighting of 2%, with a weighted rank of #9 across all funds. Ark currently has a 1.89% stake in the company.
SPOT generated €2.17 billion in revenues in the fiscal fourth quarter ended December 31, 2020, up 17% year-over-year. This can be attributed to a 27% rise total monthly active users over the quarter. However, the company’s loss from operations amounted to €69 million over this period, indicating a 72.5% sequential rise. SPOT’s net cash flows from operating activities declined 47% year-over-year to €107 million, while its free cash flow fell 56% from the prior-year quarter to €74 million.
Despite being one of the biggest companies in the music industry, with a market capitalization of $55.17 billion, SPOT has yet to break even. SPOT’s poor financials, despite rising number of monthly users, reflect poor management. The company has an ISS Governance Quality Score of 7, indicating substantial governance risk. SPOT has gained 125.8% over the past year but declined 6.9% year-to-date.
The Street expects SPOT’s EPS to decline 140% year-over-year in the about-to-be-reported quarter, ended March 2021. Also, the company’s EPS is expected to remain negative until 2022. SPOT missed consensus EPS estimates in three out of the four trailing quarters. Analysts expect the company’s annual revenues to hit $11.19 billion this year, up 20.2% from the same period last year.
SPOT has an overall D rating, which translates to Sell in our proprietary POWR Ratings system.
SPOT has a D grade for Growth and Quality. Of the seven stocks in the D-rated Entertainment – Radio industry, it is ranked #7. In addition to the grades we’ve highlighted, one can check out SPOT Ratings for Sentiment, Stability, Value, and Momentum here.
Zillow Group, Inc. (Z)
Real Estate internet company Z gained prominence amid the housing market boom early last year, driving the stock to a 274.9% gain over the past year. Wood started investing heavily in the stock last September on its impressive growth potential. Ark Investment ETFs have combined holdings of 6.56 million shares, which represents a 3.9% weighting. Shares of Z are present in ARKK, ARKW, and Ark Fintech Innovation ETF (ARKF). The stock has a weighted rank of #5 across all funds.
Z is one of the most popular companies in the housing market. It has revolutionized the process of buying and selling real estate. However, the housing industry is currently grappling with rising demand and lean inventories, putting pressure on mortgage rates, which are currently rising. Given the relatively fixed inventory supply in this market in the short term, demand has been decelerating over the past couple of weeks. As investors expect the housing markets to crash in the near term, we think it is best to steer clear of Z stock currently.
Z’s revenues declined 16% year-over-year to $788.95 million in the fourth quarter ended December 31, 2020. This can be attributed to a 50% decline in revenues generated from its Zillow Offers Home segment. Its loss before income taxes from the Homes segment stood at $66.62 million. Furthermore, the company’s other comprehensive income (OCI) came in at negative $2.80 million. Its consolidated net loss for the year ended December 31, 2020 amounted to $162.12 million.
Z has gained 274.9% over the past year, and 11% year-to-date. However, the stock has declined 4.4% over the past month.
Z’s EPS is expected to decline at a rate of 21% per annum over the next five years. The consensus revenue estimate of $1.09 billion for the fiscal first quarter ended March 2021 represents a 3% decline year-over-year.
Z has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. It has a D grade for Stability and Quality. In the 71-stock, F-rated Internet industry, Z is ranked #58. To view additional POWR Ratings for Momentum, Growth, Sentiment, and Value for Z, click here.
Click here to view the top-rated stocks in the Internet industry.
The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
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SHOP shares were trading at $1,205.79 per share on Wednesday afternoon, down $35.75 (-2.88%). Year-to-date, SHOP has gained 6.52%, versus a 10.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...
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