2 Growth Stocks Down 57% and 84% That Big Money Managers Are Buying

Cathie Wood is the founder and CEO of Ark Invest, a hedge fund with nearly $17 billion in assets under management. In the second quarter, Wood bought 1.9 million shares of Roku (ROKU 1.58%) stock, which made it the third-largest position in her portfolio.

Similarly, Alex Sacerdote is the portfolio manager at Whale Rock Capital Management, a hedge fund with nearly $3.4 billion in assets under management. In the second quarter, Sacerdote doubled down on HubSpot (HUBS -2.40%), adding 52,000 shares to his portfolio. It now ranks as his 16th largest holding.

Roku and HubSpot currently trade 84% and 57% off their highs, respectively. Here's why both stocks are worth buying right now.

1. Roku

Streaming platform operator Roku has battled several headwinds over the past year. Soaring inflation has blunted discretionary consumer spending, causing many brands to cut their ad budgets. And people have spent less time engaged with streaming content as the social effects of the pandemic have faded, making year-over-year comparisons look particularly bad. But Roku still managed to deliver decent financial results.

Revenue climbed 31% to $3 billion on a trailing-12-month basis, and while the company posted a GAAP (generally accepted accounting principles) loss of $0.36 per diluted share, it still generated positive cash from operations of $73 million.

Unfortunately, things may get worse in the near term as high inflation persists, but CEO Anthony Wood believes the company will ultimately benefit from the macroeconomic downturn. After budget cuts, brands will be forced to spend ad dollars as efficiently as possible, which should bring more spend to streaming platforms. That's true for two reasons.

First, there is a significant discrepancy between connected TV ad spend and traditional TV ad spend. This year, streaming will account for roughly half of TV viewing time, but brands will spend just 22% of TV ad budgets on streaming platforms. Second, connected TV ads can be targeted with much greater precision than linear TV ads, meaning brands can realize a greater return on investment.

Building on that, Roku is the most popular streaming platform in the U.S., Canada, and Mexico as measured by streaming time, and Roku leads the U.S. market in terms of smart TV sales. That advantage stems from its purpose-built operating system (Roku OS), its ad tech platform (Roku OneView), and its ad-supported streaming service (The Roku Channel).

Those three assets create a powerful flywheel effect. Roku OS and The Roku Channel bring viewers to the platform, and Roku OneView empowers brands to engage those viewers with targeted ads. In turn, Roku collects more ad revenue, enhancing its ability to license and create quality content for The Roku Channel.

With that in mind, online video ad spend is expected to reach $259 billion by 2025, according to Omdia, meaning Roku has plenty of room to grow. And with shares trading at 3.8 times sales -- a significant discount to the three-year average of 15.3 times sales -- now looks like a great time to buy this growth stock, in spite of the uncertain near-term outlook.

2. HubSpot

Customer relationship management (CRM) software is mission-critical for many modern businesses. It acts as a shared system of record that drives productivity across marketing, sales, and customer service, helping organizations deliver a delightful experience throughout the customer lifecycle.

Of course, Salesforce has dominated the industry for years, but HubSpot ranks as the CRM leader among small and medium-sized businesses (SMBs). Its freemium pricing model is particularly attractive to that cohort, and the company offers three tiers of paid products (ranging from starter to enterprise) that lay the foundation for a strong land-and-expand growth strategy.

Over the past year, HubSpot's customer count rose 25% to 150,865, and the average customer spent 10% more. In turn, revenue climbed 42% to $1.5 billion, and free cash flow rose 23% to $178 million. Moreover, shareholders have good reason to believe that momentum will continue. HubSpot has consistently brought new products and features to its platform, and that steady innovation should keep the company at the forefront of the SMB niche in the CRM industry.

To elaborate, HubSpot launched its redesigned Service Hub earlier this year, which now includes more communication options and time-saving automation tools. The company also introduced new features for Sales Hub and HubSpot Payments, expanded its ecosystem of third-party integrations, and launched a free version of its CMS Hub, a content management system that helps businesses build personalized webpages.

Looking ahead, the CRM market is expected to grow at 13% per year to reach $158 billion by 2030 according to Grand View Research. That puts HubSpot in front of a sizable opportunity, and with shares trading at a reasonable 9.3 times sales, this growth stock is worth buying.