Cathie Wood is CEO of ARK Invest, whose ETFs have significantly outperformed the broader market in the early stages of the pandemic. Today, however, things are different, as many of ARK Invest’s actively managed ETFs have lagged over the past year. This is not surprising; Cathie Wood and her team are big fans of growth stocks, a stock category that has been particularly hard hit by the recent downturn.
Should Investors Avoid Cathie Wood’s Stock Picks? Not at all. Despite recent troubles, some of the companies she’s invested in look like solid long-term winners. Let’s look at two examples: Veeva systems (VEEV -0.19%) and MercadoLibre (MELI -4.12%).
1. Veeva Systems
Veeva Systems operates in the highly competitive cloud computing industry but has thrived by specializing in providing cloud-based software solutions to life science companies. In this highly regulated market, regulatory compliance is paramount – and it’s always changing and evolving. Developing innovative life science products while staying on the right side of the law can be challenging.
This is where Veeva Systems comes in; Its cloud offerings enable life sciences companies to store data and keep their product development efforts current while staying compliant. Veeva Systems has continued to expand its customer base while increasing its sales and profits.
Veeva’s retention rates for its subscription services were 119% for fiscal year 2022 ended Jan. 31. This was not an isolated case; The company routinely records retention rates in this range.
In the second quarter of fiscal 2023, which ended July 31, Veeva’s revenue grew 17% year over year to $534.2 million. The company’s adjusted net income was $166.2 million, up 9% from the comparable period in the prior fiscal year.
Veeva Systems is not without risks. One of the most obvious is the rating. Despite a 43% drop in shares over the past year, Veeva’s forward price-to-earnings (P/E) ratio is 40. The average forward P/E for the S&P500 is less than half as high at about 17. Veeva Systems’ valuation is particularly concerning given that its revenue growth has slowed somewhat in recent quarters.
That’s one of the reasons the stock has underperformed the market lately, and investors should expect the company’s shares to remain somewhat volatile in the short-term.
On the other hand, the company’s long-term prospects remain attractive. Veeva Systems estimates the total addressable market (TAM) at $13 billion. The company’s trailing-12-month revenue was $2 billion — a fraction of its TAM. Additionally, Veeva Systems’ capabilities will expand along with the massive (and growing) $2.2 trillion life sciences industry.
Given Veeva Systems’ still great and untapped potential, it’s far too early to ditch its shares. Over time, it will recover from its recent struggles and offer shareholders solid returns.
MercadoLibre is the largest e-commerce specialist in South America. The company’s leadership position in the region has earned it the flattering nickname “the Amazon of Latin America.” There is some truth to that moniker, but it doesn’t tell the whole story. MercadoLibre’s breadth of services isn’t exactly a one-to-one replica of what Amazon does. MercadoLibre’s services also include its fintech arm Mercado Pago, a service that allows merchants to open and operate an online storefront called Mercado Shops, among other things.
MercadoLibre has arguably built a solid competitive advantage from at least two sources. First, like other e-commerce specialists, its platform benefits from the network effect; its value increases as more people use it. More dealers attract more customers and vice versa. Second, MercadoLibre’s offerings have high switching costs. Vendors rely on the company’s diverse offerings to conduct their day-to-day operations, making it difficult to disembark. These factors have helped MercadoLibre consistently deliver solid results.
In the second quarter, the company’s revenue rose 53% year over year to $2.6 billion. MercadoLibre’s gross merchandise volume — the total value of transactions completed on its platform — grew 21.8% year over year to $8.6 billion. MercadoLibre’s net income was $123 million, up from the $68 million reported in the same period last year.
With an expected P/E of 112, MercadoLibre looks even more expensive than Veeva Systems. The good news is that the possibilities are even more enticing. E-commerce penetration in Latin America is lower than in the US and other countries like China. The industry is forecast to grow rapidly in the region in the coming years.
As the leader in this space, MercadoLibre is ideally positioned to capitalize on this trend. And given its solid moat, it will be hard for competitors to seriously challenge MercadoLibre. This paints a good picture for the future of the company.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Prosper Junior Bakiny holds positions at Amazon. The Motley Fool has positions in and recommends Amazon, MercadoLibre, and Veeva Systems. The Motley Fool has a disclosure policy.