There's no question about it. Growth stocks have gotten hammered this year.
Not only are growth indexes like the Vanguard Growth Fund and even the Nasdaq down nearly a third from their peaks late last year, but high-growth stocks have been hit especially hard. The good news for investors is that just as growth stocks ran too high during the bull market in 2021, driven by pandemic tailwinds, there's a good argument now that they've fallen too far in this year's sell-off. Fears of a recession and rising high interest rates have crushed growth stocks this year, especially those with little or no profits.
Let's talk about two that look especially well positioned for a recovery.
1. Shopify
Up until November 2021, Shopify (SHOP -2.37%) was an undisputed market darling. The e-commerce software company had returned more than 6,000% from its 2015 IPO to its peak late last year, but since then, it's been a different story. Shopify is now down 82% from its all-time high last November.
A combination of difficult comparisons with 2021 results, a slowdown in growth as shopping habits shift away from e-commerce, increased competition from Amazon, and fears that the company could be closer to maturity than previously thought all seem to have combined to sink the stock. A stock split earlier this year did little to help the share price.
However, Shopify's prospects look better than the stock crash would indicate. After a boom in 2020 and 2021, revenue increased 16% in the second quarter to $1.3 billion, giving it a compound annual growth rate of 53% over the last three years. Other key top-line metrics grew steadily as well, even though the company was lapping the boom over the last two years, and consumer spending is shifting from e-commerce to areas like travel and restaurants. Shopify has been unprofitable this year as sales growth has not kept pace with a sharp increase in expenses, but the company has demonstrated its ability to turn a profit, including last year, which should give investors confidence in its ability to grow profits over the long term.
With Shopify stock down so sharply, the best reason to buy the stock is that the headwinds facing look to be temporary. E-commerce growth has been sluggish this year as the sector digests the gains of the last two years and as consumer spending has swung to categories they were deprived of during the pandemic. Additionally, market sentiment is out of favor for stocks like Shopify as investors still seem to be preparing for a bear market.
However, those conditions will change, possibly by next year. E-commerce still has a lot of growth in front of it, and there will be another bull market, meaning Shopify looks like a bargain trading at a price-to-sales ratio of just over 5 based on this year's expected revenue.
2. Roku
Like Shopify, Roku (ROKU 0.15%) was a big winner during the pandemic and has fallen sharply since then. The streaming device maker and advertising platform saw its stock plunge 87% since last fall after soaring through much of its history as it had gained roughly 2,000% from its 2017 IPO.
Roku stock plunged in its most recent earnings report as the company missed revenue estimates and gave third-quarter guidance that was well below analyst expectations.
Sales grew 18% to $764 million as management said it was seeing stiff macroeconomic headwinds, a comment echoed by other digital advertising companies. An end to the streaming boom during the pandemic also seems to be pressuring as player (device) sales fell 19% in the quarter to $91.2 million. Growth in platform revenue, or its advertising business, remained solid, up 26% to $673.2 million. Usage also continued to grow, with active accounts up 14% to 63.1 million and hours streamed up 19% to 20.7 billion, showing that consumption was still moving in the right direction.
Like Shopify, Roku seems to have overestimated the demand trend and increased spending aggressively this year, leading to losses, though the company had previously been profitable for several quarters.
In addition to the macroeconomic climate improving, there are two major reasons why Roku stock should bounce back. Like e-commerce, streaming growth has slowed this year, but the transition from linear TV to streaming TV should continue in the coming years, especially since nearly every broadcast media company in the U.S. has launched its own streaming service. Thanks to its distribution model, Roku benefits no matter who wins the streaming wars.
Second, several top streaming services are preparing to launch ad-supported tiers, including Netflix and Disney+, which should give Roku huge new monetization opportunities. Typically, the company has received 30% of streaming ad inventory on its platform, potentially setting the company up for a windfall from Netflix and Disney ads.
After its sell-off, Roku now trades at a price-to-sales ratio of less than 3, setting it up for a strong rebound when the ad market and market sentiment improve.
