Cathie Wood attracted many investors to her ETFs for making timely investments in Tesla (NASDAQ:TSLA) and riding on many stocks that performed well during the pandemic. Her ARK Innovation ETF (NYSEARCA:ARKK) crashed in 2022 but is up by over 40% year-to-date (YTD). The famed investor tends to pick companies with high revenue growth and tremendous potential, but many of these companies have lofty valuations. Some of these companies are also unprofitable. Cathie Wood’s funds tend to perform well during bullish markets. However, high valuations leave many of these investments vulnerable to bearish markets. These are three Cathie Wood stocks to avoid which are currently in ARK Funds.
Coinbase (COIN)
Coinbase (NASDAQ:COIN) has experienced volatile trading since its early days. Any company tied to Bitcoin (CCC:BTC-USD) has seen incredible gains and losses within short amounts of time. Shares have more than doubled YTD but have cratered by more than 75% over the past five years.
Coinbase did something that is a clear indicator of Cathie Wood stocks to avoid. The company has been reporting year-over-year (YOY) revenue declines for the past few quarters. Second quarter revenue came to $708 million which marks an 11.8% YOY drop. Many Cathie Wood stocks lose value quickly if they continue to report declining YOY revenue growth. These stocks command high valuations primarily because of their revenue growth. However, declining numbers plus unprofitability make this stock risky.
Coinbase also finds itself in the SEC’s crosshairs. The SEC recently asked Coinbase to halt trades on all cryptocurrencies except Bitcoin. While it will take some time to enforce, if it ever becomes more than a headline, it’s another risk for a weakened business model.
Roku (ROKU)
Roku (NASDAQ:ROKU) was a fan favorite during the pandemic, as the company reported YOY revenue growth ranging from 50%-80%. The company even had a few profitable quarters, and things seemed to look up for the company. Declining revenue, a return to unprofitability, and weakening macroeconomic conditions caused the stock to crash in 2022. The following year has been the complete opposite, with Roku shares almost doubling YTD.
To the company’s credit, revenue has been accelerating. Roku reported 11% YOY revenue growth in the second quarter. Although it can indicate the advertising industry is ready to recover, several dark clouds and a high valuation make Roku vulnerable.
Roku shares trade at roughly -20 EV/EBITDA and have a 4.50 P/B ratio. While the valuation was worse at its peak, Roku isn’t necessarily undervalued just because it’s cheaper now than it was two years ago. The dark clouds that loom over the economy are more concerning and can impact advertising. The return of student loan payments, rising interest rates and the return of rising inflation stand to hurt consumer spending, a key component of the economy and ad industry.
These macroeconomic problems won’t only affect Roku, but the company is unprofitable and has a high valuation. Those two factors make Roku one of the Cathie Wood stocks to avoid.
Zoom (ZM)
Like many of Cathie Wood’s stocks, Zoom (NASDAQ:ZM) performed incredibly well during the pandemic. However, single-digit revenue growth isn’t that impressive for a richly valued stock. Zoom only eked out a 3.6% YOY revenue increase in the second quarter of fiscal year 2024. This low revenue growth has become common for the video conferencing corporation.
Zoom’s guidance didn’t give investors much reason to be optimistic about future revenue growth. Zoom’s leadership only projected $1.115 billion to $1.120 billion in Q3 FY 2024 revenue. The midpoint between those two numbers represents a measly 1.4% YOY revenue jump. Zoom currently trades at a 150 P/E ratio and a 6.30 PEG ratio. Both of those numbers indicate the company is drastically overvalued. Granted, the forward P/E is a more reasonable 16, but I am not convinced that the company will generate enough net income growth over the long run to achieve that figure next year.
Investors may benefit from staying away from Zoom stock and pursuing other opportunities with their limited capital.
On the date of publication, Marc Guberti did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
