To The Moon

$ARK Fintech Innovation ETF(ARKF)$ 

What can we say about 2023? We’ve just come off a truly challenging year, with a difficult bearish trend pushing stocks down across the board, especially in the tech sector. In this environment, transparency – the ability to see beneath appearances – has grown more important than ever.

Cathie Wood, founder of the ARK Invest funds and a long-time booster of technology stocks, describes the current economic conditions as a crisis. According to Wood, we’re in a moment of declining money supply, deterioration of the commodity markets, and a contraction of bloated inventories; and Wood tells us, “I believe that the current market dislocation presents an opportunity for innovation strategies to thrive when equity markets recover. Fear of the future is palpable, but crisis can create opportunities.”

Wood believes in allocating portfolio resources to disruption, to the tech companies that offer something new – a new idea, a new way of handling an old idea – that investors can leverage for gains. “Disruption can surface in surprising forms and at unexpected times. Innovation solves problems and has historically gained share during turbulent times,” she says.

Wood backs this view with a move toward two tech firms that offer the type of innovation that’s capable of disrupting their market niches. Let's take a closer look.

Block, Inc. (SQ)

Block got its start as Square, back in 2009, and changed its name to Block at the end of 2021. The company’s flagship product, a financial services platform designed to meet the needs of small- to mid-sized businesses, still goes by the name ‘Square,’ and continues to turn small entrepreneurs’ mobile devices into card readers and point-of-purchase terminals. Block also offers the growing Cash App money transfer service, as well as app-based music streaming, web hosting, and buy-now-pay-later services.

Cathie Wood notes that digital wallets, such as Square and Cash App, are in the process of altering the way that online business gets done – and so, their future is still in flux. She writes of the niche, and of Square particularly: “Allowing users to transact on their smartphones, digital wallets are replacing cash and credit cards. They overtook cash as the top transaction method for offline commerce in 2020 and accounted for ~50% of global online commerce volume in 2021. During the three years from pre-COVID levels in 2019 to 2022, Square’s payment volume soared 193%, six times faster than the 30% increase in total retail spending.”

Block will release its 4Q22 results next month, but we can look back at Q3 for a snapshot of where the company stands now. The company reported total net revenue of $4.52 billion, for a 17% year-over-year gain. This top line generated a gross profit of $1.56 million; of that total, $783 million was attributable to Square and $774 million to Cash App. Square’s share of the gross profit was up 29% from the prior year, and Cash App’s an impressive 51%.

The company beat forecasts on both the top and bottom lines. The revenue beat was modest, but the adjusted EPS of 42 cents clobbered the 23-cent expectation with an 82% beat. The company is forecast to show a 29-cent adjusted EPS for the final quarter of last year.

Covering Block for Deutsche Bank, 5-star analyst Bryan Keane sees continued gains in the financial results ahead, despite the tough economic conditions. He writes, “Despite broad concerns about the potential looming recession, we remain upbeat on SQ’s fundamental trajectory heading into FY23. In particular, we believe SQ will continue pulling levers to drive margin expansion as the company increases focus on reining in opex while still investing for long-term growth. Additionally, we remain highly constructive on Cash App and believe the segment has the potential to beat 4Q22 consensus estimates as new products and services continue to drive monetization rates higher."

Roku, Inc. (ROKU)

Now we’ll switch over to the field of on-demand connected TV, the merger of TV with the internet. Roku, which offers users its Roku streaming player and content access through a subscription service, has emerged in recent years as the leader in this niche. Roku’s income stream is derived from the combination of subscription and advertisement revenues.

Connected TV, by turning the old ‘idiot box’ into an interactive audio-visual entertainment and advertising tool, and by integrating the latest is flatscreen imaging technologies, is changing the way we watch TV, and that has caught the eye of Cathie Wood.

“In 2022, TV advertising in the US underwent significant changes as linear ad spend declined by 2% in real terms to ~$70 billion and Connected TV (CTV) ad spend on the same terms increased by 14% to ~$21 billion. Pure-play CTV operator Roku’s advertising platform revenue increased 15% year-over-year in the third quarter, the latest report available, while traditional TV scatter markets plummeted 38% year-over-year in the US," Wood noted.

"Despite fierce competition, last year Roku maintained its position in the CTV market as the leading smart TV vendor in the US, accounting for 32% of the market, market share equal to Android, Tizen (Samsung), and WebOS (LG) combined," Wood added.

However, the company has suffered from the persistently high inflation, but even more so from inflation’s effects on advertisers – as their sales fell they scaled back on ad spends, which cut into the revenues and earnings of firms like Roku.