Backing innovation has been core to Cathie Wood’s investing style. It’s not always been a winning strategy – as illustrated by last year’s disappointing performance of her Ark Invest fund – but her conviction in the potential of disruptors has never wavered, even in the face of negative market action. Sticking to what she believes in, though, has been paying off this year; her Ark Invest fund’s flagship Ark Innovation ETF is up by 40% year-to-date.
That said, some of the names forming a part of the ETF have been underperforming recently and evidently Wood thinks the time is right now for loading up.
Known for fearlessly treading where others might hesitate, Wood has been increasing her stakes in two innovative stocks that have been lagging recently. We ran these tickers through the TipRanks database to get a feel for the rest of Wall Street’s current sentiment toward these names. Here’s the lowdown.
PagerDuty, Inc. (PD)
The first Wood-backed company we’ll check in with is PagerDuty, an American cloud computing firm that offers a digital operations management platform. Its objective is to help organizations’ IT departments manage and respond to critical incidents in real-time.
PagerDuty is recognized as an innovator in the field of incident management and digital ops. The company has played a meaningful role in revolutionizing how organizations handle critical incidents and ensure the reliability of their digital services. PagerDuty introduced a novel approach to incident response by providing a centralized platform that integrates with a wide range of monitoring tools and facilitates seamless collaboration among teams.
There’s obviously been growing demand for the products as the revenue haul has been steadily increasing over the past couple of years. That was the case again in the recently released first quarter of fiscal 2024 (April quarter) report. Revenue climbed by 21% year-over-year, reaching $103.2 million and slightly exceeding consensus estimates. Furthermore, adjusted EPS of $0.20 surpassed the forecasted $0.09.
So far, so good. However, the outlook was not as good as was hoped for. In fact, along with the revenue estimate for FQ2 coming in below the Street’s forecast, for fiscal 2024, the company anticipates revenue will hit the range between $425 million to $430 million, lower than the prior of $446 million to $452 million range.
Shares duly cratered in the aftermath and have retreated by 38% since April’s 52-week peak. In the meantime, Wood has been busy picking up some shares on the cheap. This month, she purchased 971,668 PD shares via the ARKK fund. In total, ARKK now holds 7,954,868 shares, currently worth $172.54 million.
Also keeping a bullish slant is Morgan Stanley analyst Sanjit Singh, despite conceding the growth outlook is not ideal.
“While management continues to deliver on its major efficiency initiative evidenced by Q1 operating/FCF margins of 16%/20% coming in well ahead of expectations and by a raise to the FY24 operating margin outlook to 11-12% from 8-9% previously, the outlook for growth was disappointing,” Singh wrote. “We remain Overweight shares given an attractive valuation at 5.5x CY24 revenue and ~21 CY24 FCF, which we think under-prices a cloud software asset delivering 85% gross margin, 90%+ gross retention and is on an accelerated path to 20%+ operating and FCF margins by the end of FY25.”
That Overweight (i.e., Buy) rating is backed by a $35 price target, implying shares have room for ~61% growth over the course of the year. (To watch Singh’s track record, click here)
Overall, 8 analysts have waded in with PD reviews recently and these break down into 5 Buys and 3 Holds, all culminating in a Moderate Buy consensus rating. At $30.57, the average target suggests shares will climb ~41% higher in the months ahead. (See PD stock forecast)
Teladoc Health (TDOC)
For the next innovative name getting the thumbs up from Wood, will turn to a healthcare disruptor. Teladoc is a leading player in the field of telehealth, revolutionzing healthcare accessibility. By leveraging technology, through its services, individuals can conveniently access medical care remotely, eliminating the need for time-consuming waits in clinics, expensive fees, and scheduling complications.
Such a value proposition proved to be particularly advantageous during the Covid-19 pandemic, and Teladoc’s stock benefited immensely from that development.
However, the story since has soured somewhat with evidence of continuously decelerating growth over the past couple of years and the company yet to turn profitable.
That said, Teladoc still beat expectations in the most recently reported print, for 1Q23. Revenue rose by 11.3% year-over-year to $629.24 million, beating the analysts’ forecast by $11 million. While Teladoc regularly operates at a loss, EPS of -$0.42 came in $0.08 above expectations. The 2Q23 revenue guide was also strong, expected in the range between $635-660 million vs. consensus at $642.72 million.
Investors generally liked the results but the overall trend for the shares has been negative since a rally earlier in the year; from February’s peak, the stock is down by 26%. Nevertheless, during this period, Wood has been showing confidence in Teladoc’s prospects; over the past 3 months, she has bought 966,120 shares via the ARKK fund. ARKK’s total haul now stands at 11,917,893 shares. At the current market price, these are worth ~286 million.
Also backing the firm’s chances, Canaccord analyst Richard Close sees room for outperformance and touts Teladoc’s low valuation as appealing.
“The company appears to continue to take a conservative stance with guidance, which could portend future upside surprises assuming the stable selling environment in both the B2B Integrated Care and D2C BetterHelp continues,” said the 5-star analyst. “The company expressed confidence in achieving annual guidance targets considering the late stage Integrated Care pipeline is up meaningfully from last year when chronic care elongated sales cycle appeared, and BetterHelp customer acquisition costs remain stable.”
“Considering the deeply depressed valuation, we believe downside risk is minimal and continued execution on conservative guidance should lead to decent appreciation from current levels. One thing remains clear, Teladoc is the best positioned company to benefit from continued acceptance and adoption of digital health,” Close went on to add.
These comments form the basis of Close’s Buy rating and $36 price target. This suggests shares will appreciate by 50.5% in the months ahead. (To watch Close’s track record, click here)
Elsewhere on the Street, the stock garners an additional 5 Buys and 11 Holds, making the analyst consensus a Moderate Buy. The forecast calls for one-year gains of 30%, considering the average target clocks in at $31.06. (See TDOC stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.