In this article we discuss the 5 best software stocks to buy according to Cathie Wood. If you want to read our detailed analysis of Wood‘s history, and hedge fund performance, go directly to the 10 Best Software Stocks to Buy According to Cathie Wood.
5. Spotify Technology S.A. (NYSE: SPOT)
Number of Hedge Fund Holders: 46
Spotify Technology S.A. (NYSE: SPOT) is a Sweden-based company that owns software that streams audio and media. It was founded in 2006 and is ranked fifth on our list of 10 best software stocks to buy according to Cathie Wood. Spotify stock has offered investors returns exceeding 35% in the past year. ARK Investment holds more than 3.8 million shares in the company worth over $1 billion, representing more than 2.05% of their portfolio. ARK activity on Spotify stock increased by 66% in the last few months.
On April 29, Spotify Technology S.A. (NYSE: SPOT) stock was upgraded to Buy from Hold by investment advisory Pivotal Research. The share price of the firm jumped 2% after the ratings update as Pivotal assigned the stock a price target of $340.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm Tiger Global Management LLC is a leading shareholder in Spotify Technology S.A. (NYSE: SPOT) with 3.1 shares worth more than $852 million.
In its Q4 2020 investor letter, Guardian Fund, an asset management firm, highlighted a few stocks and Spotify Technology S.A. (NYSE: SPOT) was one of them. Here is what the fund said:
“At the current share price, Spotify basically only represents a fraction of the value they will be able to unlock in the growing market of audio entertainment. The key for Spotify is to change a variable cost base into a fixed cost base just like Netflix has. As the market share of the big labels, measured by the daily hours of engagement of the big labels, is declining, Spotify will be able to adjust its business model and create enormous operational leverage meaning that profitability will grow faster than expenses.
The music catalogue is not the business model. The value lies in the machine learning that drives discovery and engagement, the original content from people like Michelle Obama, Kim Kardashian, and Joe Rogan, the data analytics and distribution for artists, the direct and social relations artists can have with fans through music and videos. We believe that Spotify will be worth at least five times more in 2030.”
4. Shopify Inc. (NYSE: SHOP)
Number of Hedge Fund Holders: 91
Shopify Inc. (NYSE: SHOP) is a Canadian ecommerce company founded in 2006. It is placed fourth on our list of 10 best software stocks to buy according to Cathie Wood. Shopify stock has offered investors returns of more than 66% over the course of the past twelve months. ARK Investment Management holds more than 1 million shares in Shopify worth close to $1.2 billion. This represents almost 2.3% of the investment portfolio of the hedge fund. ARK activity on Shopify stock has increased 124% in the past few months.
In earnings results for the first quarter of 2021, posted in late April, Shopify Inc. (NYSE: SHOP) reported earnings per share of $2.01, beating market estimates by $1.26. The revenue over the period was over $988 million, up 110% year-on-year.
Out of the hedge funds being tracked by Insider Monkey, Connecticut-based investment firm Lone Pine Capital is a leading shareholder in Shopify Inc. (NYSE: SHOP) with 1.7 million shares worth more than $1.8 billion.
In its Q4 2020 investor letter, RGA Investment Advisors, an asset management firm, highlighted a few stocks and Shopify Inc. (NYSE: SHOP) was one of them. Here is what the fund said:
“While we are pleased with the results of these specific purchases, we made a huge mistake of omission at that time. This mistake will likely be one of the biggest we ever make in our careers. Specifically, we did deep work on Shopify and loved everything about the business qualitatively. Unfortunately, we ultimately found ourselves unable to get comfortable with the numbers.
We built our model up from the key performance indicators (KPIs) that drive revenues. Our last save of the model dated 8/3/2016 looked as follows: (Page 2). These numbers seemed right from everything we understood about the company. While we tend not to rely on sell-side consensus estimates before finishing our own workup of the business, we do give them a look once we feel comfortable with how we have approached our analysis as it is often helpful to get a sense of what the average participant in the market expects the business to do. With Shopify, the sell-side consensus was so far from where our numbers were shaking out, it seemed almost impossible that we were basing our analysis on the same underlying information. Our natural next step was thus to take the sell-side consensus data and work backwards to figure out the implied expectations on each of the key revenue drivers. Here is what the sell-side consensus looked like as at the time: (Page 2).
Shopify’s actual revenues for 2016-2018 ended up being $389m, $673m and $1,073m. In other words, not only were we justifiably far more optimistic than the consensus estimate, but we also were far too conservative in terms of how the company actually performed.
The nature of our job as securities analysts is to take calculated risks, in an uncertain world where the “true” answer is inherently unknowable before the fact. We operate in what many call an “efficient market” and subscribe to the belief that for the most part, markets are generally pretty efficient and it requires differentiated analysis to find a return above what the market can offer. So why did we pass on Shopify despite 1) deeply believing in the qualitative elements of the business; and, 2) seeing a meaningful gap between what we expected and the consensus expected? The answer is unfortunate but simple: we lacked confidence in ourselves. It was the first time we truly experienced such a stark divergence between our expectation and the consensus and the result was the inclination was to pound ourselves over the head with how dumb we must be, rather than the other way around. We also learned that the truly great companies use their strong business advantages, smart management and execution to raise the bar every step along the way. Obviously this is a cycle which cannot continue ad infinitum, but especially in instances where our qualitative work identifies the inherent strengths in the business and the numbers shake out to be quite fair, the consistent “raising of the bar” can be a potent driver for the stock.
Please do not judge us too harshly for our mistake on Shopify, for we have from the very beginning made one commitment above all else to both our clients and ourselves: that we will be better today than we were yesterday, and better tomorrow than we are today. While this mistake was quite costly, it ended up being a key confidence and process builder.”
3. Zillow Group, Inc. (NASDAQ: Z)
Number of Hedge Fund Holders: 82
Zillow Group, Inc. (NASDAQ: Z) is a Washington-based online real estate company founded in 2004. It is ranked third on our list of 10 best software stocks to buy according to Cathie Wood. Zillow stock has returned more than 101% to investors over the past year. The hedge fund run by Wood owns more than 10 million shares in the company worth over $1.3 billion, representing close to 2.6% of the investment portfolio of ARK Investment. Zillow has stakes in the finance and insurance businesses as well.
On April 21, Zillow Group, Inc. (NASDAQ: Z) stock was given a Buy rating with a $230 price target by investment advisory Benchmark on the back of strong growth prospects for Zillow that had earlier dropped close to 37% after hitting a 52-week high in February.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm SRS Investment Management is a leading shareholder in Zillow Group, Inc. (NASDAQ: Z) with 7.3 million shares worth more than $946 million.
In its Q1 2021 investor letter, Baron Funds, an asset management firm, highlighted a few stocks and Zillow Group, Inc. (NASDAQ: Z) was one of them. Here is what the fund said:
“Zillow Group, Inc. operates leading U.S. real estate sites, a mortgage marketplace, and the Zillow Offers home-buying business. Shares fell during the quarter in concert with the broader rotation out of technology-based stocks despite the company’s continued inflection in mortgages revenue, strong profitability in its core business, and a positive real estate outlook as Zillow builds out its iBuying ecosystem. In our view, Zillow is a leader in the large online real estate advertising market with substantial upside from mortgages and Offers, and we remain investors.”
2. Roku, Inc. (NASDAQ: ROKU)
Number of Hedge Fund Holders: 63
Roku, Inc. (NASDAQ: ROKU) is a California-based company that offers users access to streaming media content. It was founded in 2002 and is placed second on our list of 10 best software stocks to buy according to Cathie Wood. Roku stock has offered investors returns exceeding 219% in the past twelve months. ARK Investment holds close to 5 million shares in the company worth over $1.6 billion. These represent more than 3.2% of the investment portfolio of the hedge fund. ARK trimmed their stock in Roku by 8% in the past few months.
Roku, Inc. (NASDAQ: ROKU) posted earnings results for the first quarter of 2021 on May 6, reporting earnings per share of $0.54, beating market predictions by $0.67. The revenue for the first three months of 2021 was over $574 million.
At the end of the first quarter of 2021, 63 hedge funds in the database of Insider Monkey held stakes worth $3.7 billion in Roku, Inc. (NASDAQ: ROKU), up from 60 in the preceding quarter worth $3.2 billion.
In its Q4 2020 investor letter, RGA Investment Advisors, an asset management firm, highlighted a few stocks and Roku, Inc. (NASDAQ: ROKU) was one of them. Here is what the fund said:
“For two years running, Roku has now been either the largest or second largest driver of performance in portfolios. When we purchased Roku, obviously we never expected such a phenomenal outcome, so quickly—these things can only be chalked up to luck. However, we do think luck is the residue of design and Roku had all the hallmarks ex ante as the kind of position that could do something wildly spectacular. One of the first signs in seeing Roku’s potential was the sharp contrast between our modeled expectations for the top line of the business and where the consensus expectations were. This was the Shopify setup all over again. By this time, we had added an additional tool to our analytical framework, and this helped further enforce our conviction that not only was it we who were right about where things should go, but also that the very existence of this gap could be a potent source of fuel behind the stock as the world came around to our expectation. Specifically, we had become increasingly comfortable building lifetime value analyses of companies, and notably, when we bought Roku, we were quite confident that with only modest annual increases in average revenue per user (ARPU), and a 5-year average customer lifespan, we were buying the company for its existing customer base and nothing more. In other words, the growth at Roku was entirely free at the prevailing prices we bought into.”
1. Square, Inc. (NYSE: SQ)
Number of Hedge Fund Holders: 92
Square, Inc. (NYSE: SQ) is a California-based digital payments firm founded in 2009. It is ranked first on our list of 10 best software stocks to buy according to Cathie Wood. Square stock has offered investors close to 177% in returns over the past year. The hedge fund chaired by Wood holds close to 11 million shares in the company worth over $2.4 billion. It is the third largest holding of the New York-based fund. ARK activity on Square stock increased by 56% in the past few months.
On May 26, Square, Inc. (NYSE: SQ) announced that it had entered into a deal with Noble to implement online payments processing for food and drinks at live events. The deal provides Square sellers with a concessions platform to enhance operations.
Out of the hedge funds being tracked by Insider Monkey, Texas-based investment firm Bares Capital Management is a leading shareholder in Square, Inc. (NYSE: SQ) with 4.9 million shares worth more than $1.1 billion.
You can also take a peek at Eagle Capital’s Top 10 Stock Picks and Billionaire David Siegel’s Top 10 Stock Picks.
