Amid first-quarter struggles for growth stocks, some members of this category are trading at discounts relative to their histories of often lofty valuations.
Perhaps surprisingly, some names with the disruptive growth label are in the discounted growth stock conversation. That includes some members of the ARK Innovation ETF (ARKK).
The actively managed ARKK is one of the ETF pioneers in terms of making disruptive growth investing more accessible to a wider audience of market participants. The fund is usually comprised of mid-cap and smaller large-cap stocks with significant long-term growth potential. As such, rare are the occasions that ARKK member firms are attractively valued.
That’s simply the price of admission, but amid fears that rising interest rates will make the longer-term cash flows of innovative growth firms less compelling, some growth stocks, including some ARKK holdings, are languishing. However, the silver lining in that scenario is that some growth names now offer discounts.
“The result is that U.S. stocks have gone from broadly overpriced to fairly valued, based on valuation estimates for stocks covered by Morningstar’s equity analysts,” says Morningstar analyst Dave Sekera. “The most notable change has been in growth stocks. Shares of the fastest-growing companies had also tended to be the most overvalued. But now that category has become undervalued, and is even more attractive than value stocks.”
Among the ARKK holdings that Morningstar sees as currently undervalued are telehealth leader Teladoc (NYSE:TDOC) and cloud computing firm Twilio (NASDAQ:TWLO). Teladoc is the ETF’s second-largest holding at a weight of 6.91%, while Twilio accounts for 4.22% of the ARKK roster.
“These stocks then crashed back to earth in 2021 in many cases falling over 50+% from their highs. The downward momentum has now brought many of these companies deep into undervalued territory and we rate a number of them with 4- and 5-stars. Teladoc, Palantir, Twilio, and DocuSign fall into this category,” adds Sekera.
While not necessarily a deeply discounted name as of yet, DraftKings (NASDAQ:DKNG) — 2.79% of ARKK — said on Thursday that it sees a total addressable market for North American iGaming and online sports wagering of up to $80 billion, well ahead of a prior forecast of $67 billion.
The gaming company made those comments during its investor day while also highlighting strong customer retention and a solid outlook for market share.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.