Well-known investor Catherine D. Wood is the founder, CEO, and CIO of Ark Invest, an investment management firm. Its flagship fund, ARK Innovation ETF (ARKK), seeks to generate long-term capital appreciation by investing in businesses across the globe that benefit from disruptive innovation.
However, Wood’s ARKK ETF has faced a rough patch amid uncertain market conditions this year. Recurring increases in interest rates by the Federal Reserve and a strengthening dollar have aggravated concerns of an economic downturn. Even the United Nations have called on the Fed and other central banks to halt interest rate increases.
These macroeconomic headwinds have spelled trouble for growing businesses which are finding it more expensive to sustain their growth by borrowing capital amid the liquidity crisis. As a result of the underperformance of tech stocks, ARKK has slumped 58.7% year-to-date.
Moreover, the lack of diversification in her flagship fund is considered a critical factor for its wretched performance. Based on the latest 13F filing, tech stocks made up approximately 34% of the portfolio.
Given the fund’s steep decline and ongoing macroeconomic turbulence, we think fundamentally weak Cathie Wood stocks Twilio Inc. (TWLO) and Unity Software Inc. (U), might be best avoided now.
Twilio Inc. (TWLO)
TWLO enables developers to build, scale and operate real-time communications within software applications through a cloud communication platform and a customer engagement platform. The company operates both in the United States and internationally.
On September 15, TWLO announced that it would be laying off 11% of its workforce as a part of a restructuring program. Jeff Lawson, the company CEO, said in a letter to the staff that its headcount had grown too fast as it attempted to meet its profitability goals and pursued projects that didn’t fall within the company’s priorities.
On August 8, TWLO disclosed that some of its employees and customers were hacked as part of a scheme in which outsiders duped employees into handing over their passwords. Such security breaches may lead to a significant loss of customer confidence and may have a material impact on the company’s finances.
For the second quarter of the fiscal year 2022 ended June 30, TWLO’s total operating expenses increased 41.9% year-over-year to $757.23 million. During the same period, the company reported a non-GAAP loss from operations of $7.30 million, compared to $4.20 million non-GAAP income from operations in the previous year’s quarter.
In addition, TWLO’s non-GAAP net loss rose 4.9% year-over-year to $19.25 million, which translated to a $0.11 quarterly net loss per share.
Analysts expect TWLO’s loss per share for the fiscal 2022 third quarter (ended September 2022) to come in at $0.35. Furthermore, the consensus loss per share estimate of $0.58 for the current fiscal year (ending December 2022) indicates a widening of 132% year-over-year.
The stock has plummeted 54% over the past six months and 70.9% year-to-date to close the last trading session at $76.25.
It’s no surprise that TWLO has an overall rating of D, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
TWLO also has a D grade for Momentum, Stability, and Quality. It is ranked #23 among 26 stocks in the F-rated Software - SAAS industry.
Click here to see the additional ratings of TWLO for Growth, Value, and Sentiment.
Unity Software Inc. (U)
U operates as a platform for creating and running real-time three-dimensional content. The company’s platform has two segments: Create Solutions and Operate Solutions. Its offerings include Unity Ads and Unity IAP (In-App Purchases) to help users monetize content, Multiplay for multiplayer game hosting, and Vivox to enable game player-to-player communications.
On September 12, it was announced that AppLoving Corp (APP) had scrapped its plans to acquire U after the latter opposed its $17.5 billion offer. This deal could have combined two prominent providers of tools for mobile developers.
For the fiscal 2022 second quarter ended June 30, 2022, U’s non-GAAP loss from operations widened 6351% year-over-year to $44.13 million. As a result, the company’s non-GAAP net loss came in at $53.14 million, 3862.5% worse than the previous-year quarter. Its non-GAAP net loss per share worsened by 1700% year-over-year to $0.18.
Analysts expect U’s loss per share for the third quarter of the fiscal year (ending September 2022) to widen 150% year-over-year to $0.15. Furthermore, the company’s loss per share for the current year is expected to deteriorate 94.9% year-over-year to $0.43.
The stock has plummeted 64.5% over the past six months and 74.2% year-to-date to close the last trading session at $35.81.
In concurrence with this bleak outlook, U has an overall POWR Rating of F, which translates to a Strong Sell in our proprietary rating system.
The stock also has grade F for Value and D for Stability. It is ranked #21 in the 22-stock Entertainment – Toys & Video Games industry.
In addition, we have also rated U for Growth, Momentum, Sentiment, and Quality. To see all POWR ratings for U, click here.
TWLO shares rose $0.32 (+0.42%) in premarket trading Thursday. Year-to-date, TWLO has declined -70.95%, versus a -19.76% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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