3 Stocks Cathie Wood Is Buying That Should Be on Your List Too

Cathie Wood, the famed growth investor who accumulates disruptive tech stocks for ARK Invest's exchange-traded funds (ETFs), generated big returns for her investors during the pandemic last year. Wood's flagship fund, the ARK Innovation ETF (ARKK -1.44%), rallied nearly 150% in 2020 as investors flocked toward high-growth tech stocks, which stayed resilient during the pandemic. But this year, the ETF lost more than 20% of its value as inflation-related fears rattled growth stocks.

However, Wood recently predicted the fund could still generate a compound annual return of more than 40% over the next five years. That's a bold claim, but many of the fund's battered growth stocks might rebound next year if the inflation and interest rate fears gradually subside.

Image source: Getty Images.

If investors believe in Wood's bullish thesis, it makes sense to track some of ARK Innovation's top holdings. Let's take a fresh look at three stocks that the fund has substantially increased its holdings in -- Roku (ROKU -0.40%), Zoom Video Communications (ZM -0.34%), and Twilio (TWLO -0.73%) -- and why they could be disruptive long-term winners.

How much does Cathie Wood like these stocks?

Roku, Zoom, and Twilio are the second-, fourth-, and eighth-largest positions in the ARK Innovation ETF, respectively, as of Dec. 20. Here's how much each position has grown over the past three months:

Sources: ARK Invest, Cathie's Ark.

However, Wood accumulated more shares of these stocks as their stock prices sank:

Source: YCharts

Why does Cathie Wood think these three companies are disruptive?

Those purchases, while poorly timed, indicate Wood still believes in the disruptive potential of these three companies.

Roku is the largest manufacturer of streaming media devices in the U.S. and Canada. Its software platform also powers third-party smart TVs. These two business components, which served 56.4 million active accounts last quarter, make Roku a leading play on the secular growth of streaming video platforms and the slow death of "linear TV" platforms like cable and satellite TV.

Zoom became synonymous with video calls during the pandemic. It served 300 million daily active meeting participants at the height of the crisis, and many schools and businesses upgraded to its paid tiers to host longer meetings with more participants. Zoom has also been expanding its ecosystem with Zoom Events for virtual events, Zoom Phone for audio-only calls, and dedicated hardware devices for enterprise customers.

Twilio's cloud-based platform processes integrated messages, calls, and videos for mobile apps. With just a few lines of code, Twilio enables Lyft's drivers to contact their passengers, and helps Airbnb's guests reach their hosts. It's much easier to outsource those features to Twilio than to build them from scratch.

Why did investors dump these three stocks?

Roku's stock slumped for two main reasons. First, its growth decelerated as the COVID-19 restrictions were relaxed and people watched fewer streaming videos at home. Second, the global supply chain challenges disrupted its hardware business and caused the segment's gross margin to turn negative over the past two quarters.

Zoom's stock fell as it faced tough year-over-year comparisons to its growth spurt during the pandemic. Its failed attempt to buy Five9 and intense competition from growing rivals like Microsoft Teams exacerbated the pressure and kept the bulls away.

Twilio's stock declined as concerns about its declining dollar-based net expansion rate and gross margins -- which are being squeezed by wireless carrier fees for text messages -- spooked investors.

But are these three stocks good long-term investments?

All three of these companies face near-term challenges. But, Roku's prospects could improve as it overcomes its supply chain challenges and continues to expand its software platform.

Zoom's growth could gradually stabilize, and the simplicity of its platform, early-mover's advantage, and brand appeal might hold Microsoft at bay. Meanwhile, Twilio still expects to grow its organic revenue at least 30% annually over the next three years, so it could still have plenty of room to expand.

That's why analysts still expect all three companies to generate strong double-digit revenue growth throughout this year and the following year:

Source: Yahoo Finance, Dec. 20. FY = Fiscal year.

All three stocks also trade at fairly reasonable price-to-sales ratios, especially when you consider that some of the market's highest-growth tech stocks still trade at more than 30 times next year's sales.

In other words, if investors believe these three companies will continue to grow over the long term, it might be smart to follow Cathie Wood's lead and pick up some shares.

Do your own due diligence

Roku, Zoom, and Twilio might seem undervalued relative to their growth potential after the inflation-induced sell-off, but investors shouldn't overlook their weaknesses. Roku still faces tough competition from other streaming device makers and software platforms. Zoom needs to prove that it isn't a one-trick pony. And Twilio needs to deal with its higher carrier fees while staying ahead of aggressive challengers like MessageBird.

Simply put, investors who are thinking of buying these growth stocks should do their own due diligence, recognize the risks, and see if Cathie Wood's favorite plays are actually worth buying.