Cathie Wood’s Ark Invest is selling Tesla stock and buying 2 notable Fintech growth stocks | Fool

Cathie Wood is the founder and CEO of Ark Invest, an asset management firm that invests in disruptive technology and innovation companies. The company offers several exchange-traded funds to clients, including its flagship hedge fund. Ark Innovation ETF, has returned 39% year-to-date. But Ark Fintech Innovation ETF is up 49% this year and the company is banking on that increase.

Throughout August, Ark cut its shares by Tesla — although it remains the largest position in the portfolio — and redeployed capital across a number of fintech companies, including Block (SQ -2.78%) And Adyen (GOODBYE. Y -2.22%). In terms of asset allocation, Block is currently ranked 1.6 and Adyen is ranked 1st. 51 out of 125 shares.

Here’s what investors should know about these two growth stocks.

1. Block

Block divides its business into two product ecosystems: Square for merchants and Cash App for consumers. The Square ecosystem simplifies commerce by combining hardware, software, and financial services into one cohesive platform. That end-to-end strategy eliminates complex integrations, and it initially helped Block gain momentum with micro-merchants, though the company is now pushing into the luxury market.

Meanwhile, the Cash App ecosystem simplifies consumer finance by allowing users to borrow, deposit, spend, and invest money from a single interface, and it provides that functionality while incurring Costs are much lower than traditional banks. So what? Cash App can serve unprofitable users for many financial institutions, and each new user amplifies the network effect created by its peer-to-peer capabilities. That flywheel has certainly contributed to rapid adoption. Cash App is the most downloaded digital wallet by US consumers in 2022.

Block delivered strong financial results in the second quarter. Total gross profit increased 27% to $1.9 billion, reflecting 18% growth in Square and 37% growth in Cash App, while non-GAAP earnings increased 117% to $0.39 above per diluted share. Management expects gross profit growth to decline a few percentage points in the current quarter, but the investment thesis remains solid.

Block values ​​its addressable market at $190 billion in gross profit, including $120 billion from Square and $70 billion from Cash App, and the company is taking reasonable steps to gain market share in both ecosystems. For example, Block has built a robust banking services and business software stack over the years, extending beyond payment processing. Those products are bringing a larger base of sellers to Square, while improving overall retention.

Similarly, Block recently offered Cash App Pay to Stripe and Adyen merchants, a gambit that serves a dual purpose: It gives Block another means of monetization beyond Square and enhances the Money App value proposition present to consumers (which can drive adoption) by expanding merchant acceptance.

On that note, Block’s stock is currently trading at 5.2 times gross profit, an absolute bargain compared to the five-year average of 18.9. Investors should feel comfortable buying a few shares of this fintech stock today.

2. Aden

Block certainly helps simplify commerce, but payment processors are not the only piece of the puzzle. To accept electronic payments, merchants also need a payment acceptor. When a consumer uses a card at checkout, the processor sends an authorization request to the issuing bank through the appropriate card network, and the payer settles the transaction by transferring funds from the issuer to the merchant. .

European payments company Adyen integrates processing and collection capabilities on a single platform supporting electronic payments across physical and digital channels in 100 countries. That strategy gives Adyen access to more robust data than independent processors or acquirers and uses it to increase authorization rates and prevent fraud for merchants mine. That attractive proposition has helped the company gain big customers such as McDonald’s, NetflixAnd Spotify.

Adyen is also an attractive partner for markets such as Etsy And Uber because its platform includes embedded financial services that allow businesses to create bank accounts, issue cards, and send payments to their own customers. Suffice it to say that Adyen stands out by offering a wide range of capabilities. Indeed, management says it is “the only company that can deliver a globally integrated payments solution across channels through a single platform”.

Adyen had mediocre financial results in the first half of the year. Revenue rose 21% to 739 million euros, well below analysts’ forecasts of 40% growth, and net income was flat at 282 million euros due to significant headcount expansion. But investors reacted strongly as shares fell 40% after the report.

That seems like an overreaction, especially since management reiterated its expectation that revenue will grow “in the mid-20s to low-30s over the medium term” in its latest letter to shareholders. That growth trajectory makes its current valuation of 4.3 times revenue look pretty cheap. In fact, the stock has never been cheaper at any point in the past three years. Investors should consider buying a small amount of this growth stock now.