So far in 2022, the S&P 500 is down over 5%. While nobody wants a negative return on their investment, the S&P's year-to-date performance has been significantly better than many well-known growth stocks. In the short term, investing in the overall market has been a winning strategy. Over the long term, however, investing in the right individual stocks can provide shareholders with outsize gains.
Netflix (NFLX 1.74%), Shopify (SHOP -2.37%), and Roku (ROKU 1.58%) have all underperformed the market by over 30% in 2022. With a recent track record like that, one might assume they're not good investments. However, nothing could be further from the truth. Every company experiences down periods with their stock price. Investors who can look beyond the market movements and into the businesses themselves can find enticing buying opportunities.
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1. Netflix
Once the undisputed king of streaming, Netflix now faces stiff competition. Netflix is still the streaming leader, ending 2021 with over 220 million paying memberships, but that lead is slipping. The Walt Disney Company's Disney+ streaming service had 130 million subscribers at the end of 2021, and HBO Max came in at 74 million subscribers. Even with this increased competition, Netflix remains a force to be reckoned with.
Fourth-quarter 2021 revenue increased 16% to $7.7 billion year over year, and paid memberships grew 9%. Looking at the subscriber growth from the year-ago quarter might make Q4 2021 look less impressive, but Netflix is facing tough comps to the quarters in which the pandemic led to a pull-forward of subscriber growth. It will take some time for that to stabilize. Netflix has also grown its average revenue per user in the U.S. and Canada in each of the last five quarters. The recently announced price increase should further improve that metric.
So why is now the time to buy? Netflix currently trades for six times sales, a multiple not seen in over five years. Over that same time frame, Netflix has increased revenue by over 200%. Concerns about increased competition are valid, but at this valuation, it's worth picking up shares.
2. Shopify
Shopify is down by over 40% in 2022, despite being one of the strongest and best-performing businesses in the world. Shopify's fiscal 2021 ended with revenue, gross merchandise volume, and gross profit up 57%, 47%, and 61%, respectively. Shopify has also been able to run its business more efficiently, with operating expenses as a percentage of revenue dropping from 50% in 2020 to 48% in 2021.
Shopify is focused on continually adding features to its platforms that make e-commerce easier for its customers. One example of this is a recent partnership with Global-e Online (GLBE -2.15%), which will help simplify cross-border payments for Shopify's merchants. This helped the Shopify Plus subscription service onboard many new brands in Q4, including some that are tied to well-known celebrities like Cardi B. and Tom Brady.
A recent uptick has put Shopify's price-to-sales multiple at 19. While not cheap, shares are trading at a valuation similar to those from mid-2019. Shopify is a world-class business that analysts expect to grow nearly 40% annually over the next five years, taking advantage of its recent market underperformance is a smart move for investors.
3. Roku
While it may be known to consumers for its hardware streaming device, there's more to Roku's business for investors to consider. In fact, 83% of Roku's fiscal 2021 revenue came from selling ads on its platform. Management believes that by adding users, growing their streaming hours, and monetizing time spent on its platform, Roku can grow its business as the shift to streaming services continues.
2021 was a strong year for Roku. Compared to 2020, active accounts grew 17%, streaming hours increased 25%, and average revenue per user was up 43%. These user metrics resulted in revenue growth of 55% and platform revenue growth of 80%. This platform revenue growth is significant because it's a much higher margin, helping Roku's gross margin increase by 74% in 2021.
Roku is currently down 45% in 2022, trailing the S&P 500 significantly. This sell-off has brought Roku's price-to-sales ratio down to 6.3, near the lowest it's ever been. Streaming is here to stay, Roku is clearly executing on its business plan, and shares are as cheap as they've been in several years. Now is a great time to pick up shares.
