This has been a tough year for ARK Invest founder and CEO Cathie Wood. Her style of investing has fallen out of favor, and many of her larger holdings have shed more than half of their peak values.

Among her funds' holdings, Twilio (NYSE: TWLO), Zoom Video Communications (NASDAQ: ZM), and Toast (NYSE: TOST) are down by 43%, 56%, and 50%, respectively, from the all-time highs they hit earlier this year. ARK Invest added to all three positions on Wednesday.

Twilio

The best performer on this list -- relatively speaking, of course -- is Twilio, which has shed more than 40% of its value since peaking in February. It's a pretty dynamic company, providing developers of some of the most popular smartphone apps with in-app communication solutions. 

What does this mean exactly? Well, if you're hailing a ride, it's Twilio helping you communicate with your driver. Twilio can help parties communicate by text or voice without having to leave a business's app or reveal sensitive contact information. Its success is tethered to the success of its active customers, which now number more than 250,000. Its dollar-based net expansion rate of 131% means that its returning developer clients are, on average, spending 31% more with Twilio than they were a year ago. This is a testament to both increased usage volume and the company's ability to "land and expand" with other platform offerings. 

Twilio's revenue soared by 65% in its latest quarter, but acquisitions have typically padded its top line. Organic revenue rose by just 38%, and that result didn't please the market despite it being a healthy rate of year-over-year improvement. Investors are also concerned about larger than expected losses in Twilio's refreshed guidance, but you have to give the company the benefit of the doubt when it comes to investing in its future. 

Zoom Video Communications

Another stock that was doing poorly this year even before its latest financial update sent the shares even lower is Zoom. The videoconferencing giant erupted onto the scene early last year when people found themselves in sudden need of an intuitive videoconferencing solution that would allow them to keep learning, working, and socializing during the early months of the COVID-19 crisis. 

The public isn't as interested in the stock these days, but the irony here is that Zoom is still growing, even as we're now in the third quarter of lapping pandemic-era financials. Its revenue rose 35% in its most recent quarter, beating expectations and signaling that the platform's premium subscriptions are still essential purchases. Management is guiding for growth to decelerate to 19% in the current quarter, and even a recently botched acquisition isn't stopping the company from expanding its offerings to take advantage of its still sizable audience. 

Toast

Restaurants are Toast these days, and that capitalization isn't a typo. More than 48,000 restaurants are leaning heavily on Toast, a cloud-based platform that manages everything from incoming orders to inventory management to customer loyalty programs. 

Revenue skyrocketed by 105% through the first nine months of this year, and that was after climbing 24% in 2020 when most eateries were running with scaled-back operations. As we venture out to our favorite restaurants again -- and as Toast helps owners with the tech required to handle the boom in digital take-out and third-party delivery app orders -- Toast is well-positioned as a reopening play. But the stock has shed half of its value since peaking shortly after the company went public in late September.  

Twilio, Zoom, and Toast remain viable growth stocks. They're just a lot cheaper now than they were earlier this year, and ARK Invest's Wood isn't afraid to follow some of her favorite stocks lower. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Image source: Getty Images.

1. Zoom takes pole position in a new cloud communications competition

2. Video conferencing is a new standard feature to build around

3. Zoom gets to keep its cash hoard

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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You may have seen the name Catherine 'Cathie' Wood pop up on your investing radar over the past year or so. Or perhaps the name of the investment company she runs – ARK Invest. Ms Wood and ARK have attracted some of the most intense investor interest, particularly amongst retail investors, of almost any US fund manager in recent times. ARK's funds even pop up on the most popular US shares that ASX investors trade from time to time, which the Fool covers most weeks.  So who is Cathie Wood and ARK? And why are they now so famous?

ARK is a funds management business over in the United States. Ms Wood is its founder, CEO and chief investment officer. ARK has gained its fame through its suite of exchange-traded funds (ETFs), which specialise in high-growth, future-facing and disruptive companies, usually in the tech space. Ms Wood first rose to fame with her uber-bullish views on some prominent tech shares.

Wood drew a lot of eyeballs a couple of years ago with her unabashedly optimistic views on the electric car and vehicle manufacturer Tesla Inc (NASDAQ: TSLA). Back in May 2019, Cathie Wood surprised even the more bullish investors of Tesla when she spruiked a US$5,905 share price target for the company. At the time, Tesla was a US$40 share (adjusted for last year's stock split). It was also just before Tesla went on its millionaire-minting run. Over the following year or two, Tesla was to shoot up more than 1,100% in value. The fact that Ms Wood was one of the first investors to come out of the gates with such a bullish price target for Tesla earned her and Ark a lot of respect in hindsight.

Growth at scale

But since the days of calling Tesla's success, Cathie Wood and ARK also put some pretty convincing runs on the board. Its flagship fund – the ARK Innovation ETF (NYSE: ARKK) – returned an impressive near-40% in 2019, and almost 150% in 2020. ARK Innovation is a fund that incorporates the 'best ARK picks' from its other, more sector-specific ETFs. Between 1 January 2021 and 12 February, it added another ~25% or so. That's enough performance to catch any investors' eye. Other ARK ETFs performed similarly well, if not better, over these time frames. 

But since February 2021, things haven't been entirely 'coming up Milhouse' for ARK funds. The ARKK ETF has corrected sharply since February when it reached its peak of US$159.70 a unit. On today's pricing, ARKK units are back to US$112.28, giving up more than 28% off of that high.

So is ARK a spent force? Let's take a deeper dive.

What's in an ARK ETF?

Here are the top holdings, and their weightings, in the flagship ARKK ETF, as of 27 May:

As you can see, the fund is heavily weighted to high-growth tech shares. We have Tesla (naturally taking out a large chunk at the top there. But we also have companies like Roku, Square, Shopify, Spotify, Zoom and Coinbase.

These companies are all very similar in nature. They are disruptive, tech-based companies that have long growth runways, and a lot of future potential. But they are also not too profitable today, and still very much in 'growth phase'. These companies are at the stage of their lives where they are prioritising revenue growth over profitability. That's why most of them don't even have price-to-earnings (P/E) ratios yet. Or if they do, they are normally in the triple-digits. Take Tesla. Its P/E ratio is currently sitting at 635.7.

What about some other ETFs?

We see similar patterns in some of ARK's other popular ETFs.

Here are the top ten holdings for the ARK Fintech Innovation ETF (NYSE: ARKF) fund:

And here is what the ARK Next Generation Internet ETF (NYSE: ARKW) fund holds:

Again, very similar businesses – high growth, disruptive, priced for future profitability rather than the money they make today.

So why have ARK funds had a bad few months?

And now we can look at the main problem that these funds face. They tend to do well, really well, when the market is running hot, and growth companies are 'in vogue'. By definition, growth companies tend to outperform the broader markets during a bull run and underperform during a bear market. 2019, and post-COVID 2020 were decidedly the former.

But why the underperformance since February 2020? After all, the US S&P 500 Index (INDEXSP: .INX) has gone and pushed to more record highs since 12 February. Most recently on 7 May.

Well, another factor at play has been fears of inflation and rising bond yields, which have spiked in the months since 12 February. According to CNBC, the US 10-year Treasury yield was well under 1% at the start of 2021 and was around 1.18% on 12 February. This yield reached a high of roughly 1.75% in late March and still stands at 1.61% today.

Rising bond yields typically turn sentiment against companies who are being priced on future earnings, rather than what they offer today. In other words, most of the stocks that ARK funds hold. We saw similar gyrations in our own ASX tech sector between February and May.

What does the future hold for ARK?

The big corrections in the value of Ark funds over the past few months might have dented some of the optimism that many of its investors would have been feeling in the months and years prior. But if the market was once again to fall back in love with the kinds of future-facing tech companies that ARK invest in, it is conceivable that we will see ARK funds back at all-time highs. Time will only tell. But Cathie Wood and ARK are probably not going away anytime soon regardless – as barometers of high-octane growth stock investing if nothing else.

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Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Twilio (NYSE: TWLO) are both very important tech companies, but most people might only recognize the former even exists.

Alphabet, the parent company of Google, is the highly visible leader of multiple markets. Google is the world's top search engine, Gmail is the largest email platform, and Chrome is the most popular web browser. Android is also the leading mobile operating system, and YouTube is the world's largest streaming video platform with more than 2 billion logged-in monthly users.

Twilio's cloud-based platform operates behind the scenes by processing text messages, calls, and other communication services within mobile apps. Outsourcing those features to Twilio is generally cheaper, less time-consuming, and easier to scale than creating those features from scratch. Companies like Lyft, Airbnb, and MercadoLibre all use Twilio's services.

Alphabet's stock price rallied nearly 130% over the past three years as the growth of its core advertising business supported the expansion of its sprawling digital ecosystem. Yet Twilio's stock price skyrocketed over 720% as its streamlined communications tools locked in more mobile apps.

Twilio generated more explosive gains than Alphabet, but can it maintain that momentum and remain a better investment over the next few years? Let's take a fresh look at both companies and see if we can find an answer.

How fast is Alphabet growing?

Alphabet generated 80% of its revenue from Google's advertising business last year. Its ad growth decelerated in the first half of the year as the coronavirus pandemic spread, but it partly offset that slowdown with the growth of Google Cloud, which benefited from robust demand for cloud services throughout the crisis. Google's advertising business recovered in the second half of the year as more businesses reopened.

Alphabet's revenue rose 13% to $182.5 billion in 2020 as its net income increased 17% to $40.3 billion. Its full-year operating margin expanded, from 21% to 23%, as it reined in its spending.

In the first quarter of 2021, Alphabet's revenue rose another 34% year over year as its advertising business recovered against easy comparisons to the previous year. Google's total ad revenues increased 32% to $44.7 billion as Google Cloud's revenue grew 46% to $4.05 billion.

Its operating margin expanded again, from 19% to 30%, and its net income surged 162% to $17.9 billion. Wall Street expects its revenue and earnings to rise 30% and 51%, respectively, this year.

Alphabet's future looks bright, but there are still a few challenges ahead. It still faces regulatory challenges in several markets, tough competition in the advertising market from Facebook, Amazon, and other platforms; and it still trails far behind Amazon Web Services (AWS) and Microsoft Azure in the cloud infrastructure market. Apple's latest privacy changes to iOS could also affect its targeted ad sales.

How fast is Twilio growing?

Twilio's revenue rose 55% to $1.76 billion in 2020. It posted a full-year net expansion rate of 137%, which means its existing customers spent 37% more money on its services.

However, Twilio's net loss still widened from $307 million to $491 million. On a non-GAAP basis, which excludes its stock-based compensation and acquisition-related expenses, its net income rose 62% to $35.9 million.

Twilio will post its first-quarter earnings on Wednesday, May 5, and it previously guided for 44%-47% year-over-year revenue growth. Analysts expect its revenue to rise 39% for the full year, but for its non-GAAP earnings to dip into the red again as it ramps up its spending and faces three major challenges.

First, new A2P (application to person) fees from carriers, which are charged whenever an app accesses the SMS network, will weigh down Twilio's gross margins. Its growing dependence on acquisitions to boost its revenue could exacerbate that pressure.

Second, it still faces competition from similar platforms like Vonage's Nexmo, Bandwidth, and MessageBird. Those competitors could all make it tough for Twilio to raise its prices and offset the impacts of its A2P fees and inorganic growth strategies.

Lastly, Twilio relies heavily on big stock-based bonuses and secondary offerings to preserve its cash. As a result, its number of outstanding shares has increased by a whopping 70% over the past four years.

The valuations and verdict

Alphabet trades at 25 times forward earnings and less than seven times this year's sales -- which makes it a reasonably valued stock in the frothy tech sector. Twilio trades at 26 times this year's sales, making it a much more speculative stock, and the ongoing dilution of its shares could keep its valuations elevated.

If I had to choose one over the other, I'd pick Alphabet because its core business is more stable and its stock is cheaper. I still admire Twilio's business, but investors shouldn't pay the wrong price for the right company -- especially as higher bond yields potentially spark a rotation from growth to value stocks.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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