Better Buy: Roku vs. Pinterest

Roku (ROKU 0.15%) and Pinterest (PINS -0.52%) both experienced major growth spurts during the pandemic as more people stayed at home. Roku sold more streaming devices as advertising revenues on its software platform (which also runs on third-party devices) consistently increased. Pinterest's virtual pinboards became a popular place to search for online shopping suggestions, recipes, DIY projects, and other stay-at-home activities.

But both companies faced tough slowdowns in a post-pandemic market as people spent more time outside again. Rising interest rates and other macro headwinds exacerbated that pressure by driving investors away from higher-growth tech stocks. That's why shares of Roku and Pinterest have declined roughly 77% and 32%, respectively, this year.

Image source: Getty Images.

Should investors consider buying either of these burnt-out pandemic plays as the bulls look the other way? Let's review their near-term challenges, longer-term prospects, and valuations to find out.

Which company is growing faster?

The following table illustrates just how much momentum Pinterest and Roku lost this year in a post-pandemic world:

Data source: Company earnings reports. YOY = Year-over-year.

Pinterest didn't provide any precise guidance beyond its forecast for "mid-single-digit" revenue growth in the fourth quarter, but analysts expect its revenue to increase just 9% for the full year. Roku expects its revenue to grow 11% for the full year.

What near-term challenges do they face?

Pinterest's monthly active users (MAUs) stayed nearly flat year over year at 445 million in the third quarter, but remained well below its pandemic-era peak of 478 million MAUs in the first quarter of 2021. Roku has been faring better than Pinterest in terms of user growth -- its number of active accounts grew 16% year over year to a record high of 65.4 million in the third quarter, which represented an acceleration from its 14% growth in the second quarter.

Pinterest has been partly offsetting its sluggish growth in MAUs by growing its average revenues per user (ARPU), but its margins are still being squeezed by the macro headwinds in the advertising market. Roku's ARPU has also been rising, but that growth has been partly offset by its weak sales of streaming players -- which have declined year over year for five consecutive quarters. The gross margins for its player business have also remained negative for six consecutive quarters, while the gross margins of its platform business are being squeezed by the macro headwinds in the advertising market.

Pinterest's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) surged 167% in 2021, which bosoted it adjusted EBITDA margin from 18% to 32%. But this year, analysts expect its adjusted EBITDA to tumble 47% and for its adjusted EBITDA margin to drop to 15%. Roku's adjusted EBITDA surged 210% in 2021 as its adjusted EBITDA margin more than doubled from 8% to 17%. However, Roku's adjusted EBITDA turned negative over the past two quarters, and analysts expect it to post a negative adjusted EBITDA margin of 4% for the full year. 

Which company has brighter long-term prospects?

Roku's core business is still expanding, as seen in its growth in active accounts and streaming hours. It faces a lot of competition in the streaming market from tech giants like Amazon (NASDAQ: AAPL) and Apple (NASDAQ: AAPL), but it could still rein in plenty of viewers and advertisers who don't want to get locked into those walled gardens. The expansion of its ad-supported Roku Channel could also gradually widen its moat with more first-party and licensed content.

Pinterest faces a murkier future. Its MAU growth remains sluggish, it's heavily dependent on its overseas users (which generate lower revenues than its users in the U.S. and Canada), and it has yet to realize its long-term goal of becoming a "social shopping" platform that straddles the social media and e-commerce markets. Its rumored buyout talks with PayPal last year, which preceded an exodus of top executives, raise additional red flags regarding its long-term prospects.

The valuations and verdict

Roku's enterprise value of $6.6 billion values the company at just two times next year's sales. Pinterest, which has an enterprise value of $14.5 billion, is valued at 4.5 times next year's sales. Roku is expected to remain unprofitable on an adjusted basis next year, while Pinterest trades at 32 times Wall Street's adjusted earnings estimate for 2023.

I wouldn't rush to buy either of these beaten-down stocks in this tough market. But if I had to pick one over the other, I'd stick with Roku because it's growing faster, it's still gaining viewers, its stock is cheaper, and its long-term prospects seem brighter. As for Pinterest, it needs to prove that it wasn't just a pandemic-era "hit" to be a worthwhile investment again.