Roku (ROKU -3.31%) and Facebook (META -2.15%) have both generated big returns for investors since their public debuts. Roku went public at $14 a share in 2017, closed at $23.50 the first day, and is now worth nearly $430 per share. Facebook went public at $38 a share in 2012, barely budged on the first day, but eventually surged to about $270 per share.

Roku clearly delivered bigger gains within a shorter time frame than Facebook, but is it the better long-term investment? Let's take a fresh look at both companies to find out.

Different business models

Roku generated 71% of its revenue from its software platform, which hosts online ads and content distribution partnerships, in the first nine months of 2020. Roku's software runs on its own streaming devices, set-top boxes from internet providers, and licensed smart TVs from hardware partners.

A massive screen comprised of smaller screens.

Image source: Getty Images.

The remaining 29% of Roku's revenue came from its player business, which sells its streaming sticks and set-top boxes. Roku's hardware accounts for 43% of the U.S. streaming device market, according to a recent Deutsche Bank survey, while Amazon (AMZN -1.54%) ranked second with a 35% share. Roku generated 92% of its gross profit from the higher-margin platform business in the first nine months of the year.

Facebook generated 98% of its revenue from online ads in the first nine months of 2020. It mainly displays those ads across its Facebook app, its Instagram app, and third-party apps and websites through its Audience Network. It shares a near-duopoly in digital advertising with Alphabet's Google across most developed markets.

The remaining sliver of Facebook's revenue came from its "other" business, which mainly sells its Oculus VR headsets and Portal smart screens. It currently enjoys a first-mover's advantage in the VR market, but it remains far behind Amazon and Google in smart speakers and smart screens.

Which company is growing faster?

Roku's revenue surged 57% year over year to $1.3 billion in the first nine months of 2020, as its platform and player revenues grew 66% and 40%, respectively.

A young woman watches TV in a dark room.

Image source: Getty Images.

Roku ended the third quarter with 46 million active accounts, up 43% from a year ago, as its average revenue per user (ARPU) jumped 20% to $27.

During the Q3 conference call, CFO Steve Louden said the pandemic "only accelerated the long-term trend toward all TV being streamed." Roku's recent purchase of Quibi's entire content library, which will be offered for free on the Roku Channel later this year, could help it maintain that momentum.

Roku also posted its strongest year-over-year growth in device shipments in more than seven years during the third quarter, which indicates it isn't losing any ground to Amazon, Google, or Apple.

However, Roku's net loss still widened year over year from $44.2 million to $84.8 million in the first nine months of 2020, as slower ad sales throughout the pandemic weighed down its gross margins. Wall Street expects Roku's revenue to rise 54% for the full year and another 39% in fiscal 2021, but it will likely remain unprofitable.

Facebook's revenue rose 17% year over year to $57.9 billion in the first nine months of 2020. That marked a slowdown from its 27% growth in 2019, and it was mainly caused by slower ad spending throughout the pandemic.

Yet Facebook's ecosystem still continues to expand. Its core platform ended the third quarter with 2.74 billion monthly active users (MAUs), up 12% from a year ago. Its entire family of apps -- including Facebook, Messenger, Instagram, and WhatsApp -- reached 3.21 billion people monthly, up 14% from a year earlier. Its total average revenue per person across that family also rose 7% year over year to $6.76.

Facebook is firmly profitable, and its net income rose 61% year over year to $17.9 billion during the first nine months. Analysts expect its revenue and earnings to rise 19% and 46%, respectively, for the full year.

Next year, they expect its revenue and earnings to grow 25% and 13%, respectively, as the pandemic passes. However, several looming challenges -- including an antitrust suit in the U.S., demands for more accountability after the deadly Capitol riot, and Apple's iOS 14 update, which lets users opt-in to data-tracking apps -- could cause it to miss those estimates.

The valuations and verdict

Roku is difficult to value because it isn't profitable, but its stock price isn't cheap at 22 times next year's sales. However, that price-to-sales ratio actually looks reasonable in a market filled with stocks trading at over 40 times sales.

Facebook looks cheap at 26 times forward earnings and seven times next year's sales, but many bulls are shunning it because it faces too many near-term headwinds. Unlike Roku, which maintains tight control over its platform and players, Facebook seems to have lost control of its own platform and its users -- which are essentially its products.

Based on these facts, I believe Roku is a better overall investment than Facebook. It's generating stronger revenue growth, it isn't controversial, and it isn't being targeted by antitrust probes. Investors should be wary of Roku's lack of profits and its high valuation -- but the bulls will likely favor Roku over the besieged social networking leader for the foreseeable future.