Cathie Wood stocks and her line of ARK funds have not had a very good past year. Wood’s flagship ARK Innovation Fund (ARKK) is still down about 78% from its all-time high hit in early 2021. The constituents are down by similar magnitudes. Though there may be little in the way of relief in store for 2023, I still think there could be value in looking through the ARK wreckage for unique opportunities.
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Despite the pain, Wood remains upbeat on the innovation trade longer-term. Further, she’s continued to buy the dip, showing she’s willing to act on her strong beliefs. “Innovation stocks will eventually win,” said Wood.
In this piece, I’ll look at two ARKK holdings — EXAS and U — that I am bullish on. Now, they’ll continue to be volatile, and they may still be too choppy for most risk-averse investors. However, certain investors may find it worthwhile to check in with these potential gems.
Exact Sciences (NASDAQ:EXAS)
Exact Sciences is now the largest holding in the ARKK ETF (it has a 9.45% weighting). The molecular diagnostics company is one of the most intriguing and innovative firms in the ARKK basket. Specifically, the firm behind the popular screening test Cologuard leverages some impressive biotechnology to detect cancer.
Reportedly, the cancer diagnostics market could hit $26.6 billion by 2026, at least according to market research firm MarketsandMarkets Research. That’s a big market, and Exact could grab a huge slice of it over the next few years. That alone could help Exact stock break out of its nasty funk, driven lower by increasing interest rates and macro headwinds.
Undoubtedly, Exact stands out as one potential game-changer on Wood’s radar that could rise again to see new highs.
At its worst, the stock shed more than 80% of its value from peak to trough. More recently, the stock has begun to really pick up traction, soaring over 125% since bottoming out in October 2022. The company recently reached EBITDA profitability. With such a massive market and the technological capabilities to dominate it, Exact Sciences could be one of the ARK holdings that could help power a partial recovery over the coming years.
At writing, EXAS stock trades at just 5.9 times sales compared to its five-year average of 13.8 times. That’s not expensive for one of the most intriguing innovators out there. I think the latest quarterly earnings upside surprise could be just the start.
Is EXAS Stock a Buy, According to Analysts?
Wall Street likes the name, as it has eight Buy ratings, five Holds, and zero Sells, giving it a Moderate Buy consensus rating. Nonetheless, the average EXAS stock price target of $60.31 implies 8.85% downside potential. Clearly, price target upgrades from analysts are in order after the latest run.
Unity Software (NASDAQ:U)
Unity Software is a smaller, albeit still innovative, holding in the ARK basket (it has a 3.6% weighting). If you’re a gamer, then you’re probably familiar with Unity, the platform behind many hit titles.
The firm doesn’t just have a front-row seat to gaming; with the rise of virtual and augmented reality, Unity may have a total addressable market that’s much larger than expected. The only question is whether Unity can capture the lion’s share of such a market. Still, even if it doesn’t, a small slice could mean big rewards for Unity while it’s still trading in the gutter.
The stock’s down just shy of 87% from its high, making it one of the biggest losers in the innovation scene. With 284 layoffs recently announced by the firm, questions linger as to how the innovator can retain its edge in an era of higher rates.
Management noted project “overlap” when interviewed by The Wall Street Journal. Undoubtedly, there’s room for Unity and other tech firms that overhired during the pandemic to improve upon efficiencies and productivity.
In any case, I think the damage in U stock is overdone. The company’s 9.3 times sales multiple seems unsustainably low for the type of innovation and growth (revenue grew about 24% in the past year) you’re getting from the name.
Is U Stock a Buy, According to Analysts?
Wall Street is cautiously optimistic about Unity Software based on eight Buys, four Holds, and one Sell rating, giving it a Moderate Buy consensus rating. The average U stock price target of $37.54 implies 29.9% upside from current levels.
The Takeaway
Exact Sciences and Unity Software are my two personal favorite ARK stocks at these depths based on their growth potential relative to their valuations. However, both names are extremely volatile and could make sudden moves in either direction. As such, extra due diligence is required on the part of investors.
