source: Anthony Di Pizio, Trevor Jennewine, and Jamie Louko
KEY POINTS
- 72% of last year's top 1,000 games were created using Unity Software's platfrom.
- Roku is the top streaming platform in the U.S., and also one of Ark Invest's largest holdings.
- Nvidia has majority market shares across some of the largest hardware segments in the computing industry.
The market might be beaten down, but this top technology investor remains bullish.
Ark Investment Management CEO Cathie Wood is often regarded as Wall Street's most bullish technology investor. She manages a group of nineexchange-traded funds(ETFs) focused on various areas of innovation, from financial technology to space exploration.
Those funds have been clobbered amid the broader market sell-off. The flagship Ark Innovation ETF $ARK Innovation ETF(ARKK)$ has tumbled 75% from its all-time high, but many of the individual stocks it holds still have remarkable long-term potential. Three contributors have identified Unity Software $Unity Software Inc.(U)$ , Roku $Roku Inc(ROKU)$ , and Nvidia $NVIDIA Corp(NVDA)$ as some of the best Cathie Wood picks of the bunch to buy now and hold. Here's why.
The present and future of gaming
Anthony Di Pizio(Unity Software): Video games are now among the most popular forms of entertainment globally -- the industry was worth over $180 billion in 2021. And mobile gaming now accounts for more than half of that value thanks to today's powerful smartphones, which allow players to access their favorite titles from almost anywhere. New titles are published constantly as developers reach for a piece of that massive pie. But when everyone's digging for gold, the most lucrative business opportunities often lie in selling shovels, and Unity Software does just that -- providing the world's leading suite of development tools for game creators.
Unity Pro -- its flagship platform -- provides a low-code way for creators to bring their games to life, but the company also supports those projects once they are live and on the market. It offers analytics tools to help diagnose potential issues and collect user feedback to improve the overall experience, and developers can also leverage Unity's advertising platform and its in-app purchases plugin to generate revenue more.
In 2021, 72% of the top 1,000 mobile games were created with Unity, and in fact, more than 50% of all games across all platforms were made with the company's tools. But Unity serves more than just game developers. Its powerful 3D rendering tools are used by film creators, and even in industrial applications for the design of new products. Overall, it's estimated that 3.9 billion people consumed content made with Unity every single month last year.
Unity generated $320 million in revenue during Q1 2022, a 36% year-over-year jump. But that result wasn't as strong as investors expected. The company, like many others, is grappling with challenges stemming from Apple's $Apple(AAPL)$ move last year to enhance user privacy for owners of iOS-powered devices. Those changes made it harder for Unity's clients to use highly targeted ads to attract customers.
Still, with Unity stock down 83% from its all-time high, this might be an opportunity to build a long-term position ahead of an eventual broader market recovery. The endorsement of Cathie Wood, one of the world's top technology investors, is just a bonus.
Everybody wants to own Roku
Jamie Louko(Roku): Occupying prominent positions in two of Ark Invest's ETFs, Roku is the third-largest holding in the firm's combined portfolios, signaling how optimistic Wood is about its future. That view is understandable considering that Roku is the top streaming platform in the U.S., Canada, and Mexico, with almost 21 billion hours streamed globally in the first quarter.
The company is looking to leverage its leadership to capitalize on the growth in ad spending on streaming video. Roku cited Nielsen reports that in the U.S., audiences spend 46% of their TV time streaming,, while eMarketer reports that advertisers put just 18% of their TV ad budgets toward streaming. That percentage will likely grow as advertisers adjust to the fact that Americans are spending more time watching streaming services, and Roku could be a major beneficiary.
The company has already benefited from the shift to streaming in the U.S. with revenue of almost $734 million in Q1. Roku also generated $87 million in Q1 free cash flow, which could be invested to further its dominance.
Roku isn't just attracting the attention of Wood --Netflix $Netflix(NFLX)$ also appears to have its eye on it. Rumors came out recently that Netflix was looking to buy Roku, and I can't say I'd blame it. It wouldn't be bad for it to control a leading streaming platform with more than 61 million active accounts that it could use to push more consumers toward Netflix. While these are just rumors, it makes sense that Netflix would be interested in making a bid.
That said, Roku CEO and founder Anthony Wood would likely be against such a deal. As of April 14, he owned over 17.7 million shares. Considering he believesRoku has a significant opportunity ahead,the chances are slim that he would be looking to cash out now.
Trading at just 3.8 times sales, Roku looks like a bargain, especially given its scale and the opportunities ahead of it. Advertisers could flock to it as an increasing share of ad budgets moves to streaming, and those rising revenues could propel the stock higher. I would follow in Wood's footsteps and pick up a few shares at these prices.
A semiconductor company that specializes in artificial intelligence
Trevor Jennewine(Nvidia): Gamers and creators of 3D imagery have long recognized Nvidia graphics cards as the gold standard for rendering cutting-edge visual effects. In fact, Nvidia currently holds a 78% market share in discrete graphics processing units (GPUs) and an over 90% market share in workstation graphics. But its GPUs have also become the computational accelerators of choice in data centers, particularly where artificial intelligence (AI) workloads are concerned. In fact, it currently holds a 90% market share in the supercomputer accelerator market, and its technology helps power every major cloud platform.
Nvidia's competitive edge is built on its best-in-class hardware, but the company has reinforced its strong market position by growing its portfolio of supporting software. For instance, Nvidia AI Enterprise is a suite of software that accelerates the development and simplifies the deployment of AI applications. Nvidia also provides frameworks for specific use cases, including Clara for AI healthcare applications, Riva for conversational AI applications, and Isaac for AI robotics applications.
Financially, Nvidia is growing at a blistering pace. Its revenue soared 53% to $29.5 billion over the past year, and free cash flow climbed 44% to $7.9 billion. Also noteworthy, gross profit margin jumped 280 basis points to 65.3%, and Nvidia CFO Colette Kress says that trend is set to continue as the portion of revenue provided by software grows. In other words, Nvidia should become even more profitable over time.
On that note, shareholders have good reason to be optimistic about Nvidia's future. The company puts its total market opportunity at a whopping $1 trillion, and it has demonstrated its capacity for innovation on countless occasions. For instance, it is preparing to launch its first central processing unit (CPU). According to management, the Grace CPU will be available in early 2023, and will offer 10 times the performance of the fastest server chip on the market today.
That type of innovation should keep Nvidia at the forefront of the semiconductor industry, yet its shares are trading at just 13.6times sales-- well below their five-year average of 17 times sales. With that in mind, now looks like a great time to buy this growth stock.
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