Cathie Wood buys $26 million of beat-up Shopify

When one of Cathie Wood’s favorite stocks tumbles, the head of Ark Investment Management frequently responds by increasing her position.

If you’re an experienced investor, you’ve likely heard of Wood. She may be the country’s most famous money manager after Warren Buffett.

Wood (Mama Cathie to her followers) soared to acclaim after a stupendous return of 153% in 2020 and lucid presentations of her investment philosophy in numerous media appearances.

But her longer-term performance is less impressive. Wood’s flagship Ark Innovation ETF  (ARKK) , with $6.5 billion in assets, produced annualized returns of 11% for the past 12 months, negative 25% for the past three years and positive 1% for five years.

That’s woeful compared with the S&P 500. The index posted positive returns of 29% for one year, 10% for three years, and 15% for five years. Ark Innovation’s numbers also fall well shy of Wood's goal for annual returns of at least 15% over five-year periods.

Cathie Wood’s transparent strategy

Her investment philosophy is pretty simple. Ark ETFs usually purchase emerging-company stocks in the high-tech categories of artificial intelligence, blockchain, DNA sequencing, energy storage, and robotics. Wood maintains that companies in those categories will change the world.

Of course, these stocks are quite volatile, so the Ark funds frequently fluctuate up and down. Wood adds to and subtracts from her top names frequently.

Related: Cathie Wood goes bargain hunting in beat-down tech stocks

Investment research titan Morningstar offers a harsh assessment of Wood and Ark Innovation ETF. Investing in young companies with slim earnings “demands forecasting talent, which ARK Investment Management lacks,” Morningstar analyst Robby Greengold wrote in March.

The potential of Wood’s five high-tech platforms listed above is “compelling,” he said. “But the firm’s ability to spot winners and manage their myriad risks is less so…. It has not proved it is worth the risks it takes.”

This isn’t your father’s investment portfolio. “Wood’s reliance on her instincts to construct the portfolio is a liability,” Greengold said. “The highly correlated stock prices of its holdings belie its apparent diversification across many sectors.”

Wood has defended herself from Morningstar’s criticism. “I do know there are companies like that one [Morningstar] that do not understand what we're doing,” she told Magnifi Media by Tifin in 2022.

Related: Cathie Wood buys $40 million of wounded tech stock

“We do not fit into their style boxes. And I think style boxes will become a thing of the past, as technology blurs the lines between and among sectors.”

But some of Wood’s customers apparently agree with Morningstar. During Ark Innovation’s rally of the past 12 months, it suffered a net investment outflow of $2 billion, according to ETF research firm VettaFi.

Shopify stock’s sad story

From May 13 through May 21, Ark funds snatched 453,523 shares of e-commerce-platform stalwart Shopify  (SHOP) , valued at $25.9 million as of the May 21 close.

The Ottawa company helps its merchant clients, mostly small businesses, set up their operations online and in brick-and-mortar locations.

The company assists with virtually the entire gamut of business services, including marketing, sales, fulfillment, payment and shipping.

Shopify shares have lost 24% since it reported first-quarter earnings May 8. Earnings per share and revenue beat analysts’ expectations for the quarter. But Shopify offered a disappointing forecast for this quarter.

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It predicted a slowdown in year-on-year revenue growth, to 19.5% from 23%, for the first quarter. It also sees gross margins narrowing about 0.5 percentage point from the first quarter, thanks to the sale of Shopify’s logistics business.

In addition, it expects operating expenses to climb in the low- to mid-single digits percent this quarter from Q1 2024. Analysts had forecast no change in that metric.

But Morningstar analyst Dan Romanoff likes the company.

“It offers a simple but robust e-commerce platform, with a variety of related add-on functionalities that ultimately converge into a turnkey solution for small and midsize businesses,” he wrote. 

He puts fair value for the stock at $68. It traded at $57.74 in late Thursday trading. That estimates more than 17% potential upside.

Shopify is the 12^th biggest holding in Ark Innovation.

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