Roku (ROKU 1.38%) and Shopify (SHOP 2.27%) are two of Cathie Wood's favorite long-term holdings. The famed growth investor's flagship exchange-traded fund, the Ark Innovation ETF, holds Roku as its second-largest position (7.99% of its portfolio) and Shopify as its eighth-largest position (4.55%).
Both companies grew rapidly throughout the pandemic as consumers watched more streaming videos on Roku's devices and did more online shopping through Shopify-powered storefronts. But they both faced tough post-pandemic slowdowns as those tailwinds dissipated, and rising interest rates exacerbated that pressure by driving investors away from higher-growth stocks.
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That's why in 2022, Roku's stock plunged 82%, Shopify's stock fell 75%, and the Ark Innovation ETF shed 67% of its value. But since the beginning of 2023, shares of Roku and Shopify have both soared more than 70% as the Ark Innovation ETF rallied 36%. Does that rebound indicate it's finally safe to buy either stock again?
Roku's post-pandemic slowdown isn't over yet
Roku's revenue rose 58% in 2020 and 55% in 2021, but grew just 13% to $3.1 billion in 2022 as its platform and device businesses faced near-term challenges. Its higher-margin platform business, which sells ads across its Roku OS and free Roku Channel, struggled as the macro headwinds forced companies to rein in their ad spending. Its lower-margin device business grappled with supply chain constraints, high component prices, and stiff competition from other streaming device makers.
Roku's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned negative with a loss of $84 million in 2022, compared to a profit of $465 million in 2021, as its platform gross margins shrank and its device gross margins remained negative throughout the entire year. That pressure on its device business will likely worsen because it's absorbing its higher supply chain costs instead of passing them onto its consumers. It also recently launched its own first-party Roku TVs, which it will likely need to sell at paper-thin margins or even losses to remain competitive.
On the bright side, Roku's audience continues to expand. It ended the first quarter of 2023 with 71.6 million active accounts, representing 17% growth from a year earlier, and its streaming hours continue to rise sequentially and year over year. Unfortunately, the softness of its advertising business is still making it hard to grow its average revenue per user (ARPU), which declined 5% year over year in the first quarter.
For 2023, analysts expect Roku's revenue to rise 5% to $3.3 billion, but they expect its adjusted EBITDA loss to widen to $269 million. But in 2024 they expect its revenue growth to accelerate again as its adjusted EBITDA turns positive. We should take those longer-term expectations with a grain of salt, but it suggests that Roku's challenges in the platform and device markets are merely cyclical instead of existential.
Shopify's post-pandemic growth is stabilizing
Shopify's self-service e-commerce tools enable merchants to launch their own online storefronts, process payments, fulfill orders, and manage their own marketing campaigns. That flexibility makes it a popular choice for sellers who don't want to join a crowded third-party marketplace like Amazon. It also became an essential tool for both merchants and customers when brick-and-mortar stores closed down during the pandemic.
Shopify's revenue rose 86% in 2020 and another 57% in 2021. Its adjusted net income jumped 1,332% in 2020 and grew 66% in 2021. But in 2022, its revenue only grew 21% as its adjusted net income plunged 94%. Its top-line growth cooled off as the pandemic passed, but it continued to ramp up its spending to expand its lower-margin Shop Pay payments platform and logistics network. Its acquisitions of 6 River Systems and Deliverr, which were both aimed at strengthening its logistics capabilities, exacerbated that pressure on its operating margins.
Shopify's slowing growth and plummeting profits rattled the bulls, but the company has recently made some drastic changes. During its first-quarter earnings report, management told investors that Shopify would sell its entire logistics division to Flexport for a 13% stake in the private company. It also said it would lay off about a fifth of its workforce to stabilize its profits.
As a result, analysts expect Shopify's revenue to rise 20% in 2023 as its adjusted EPS grows a whopping 700%. However, Shopify still faces plenty of competition from similar services like Adobe Commerce and BigCommerce. Amazon has also been challenging Shopify by tethering independent merchants to its payment and fulfillment platforms with its "Buy with Prime" buttons. Therefore, Shopify's growth might be stabilizing in a post-pandemic market, but it probably won't return to its feverish pre-pandemic growth rates anytime soon.
The valuations and verdict
Roku trades at three times this year's sales, while Shopify trades at 13 times this year's sales. Roku is trading at a lower valuation because it hasn't convinced the market its business model is sustainable, but investors are still paying a premium for the long-term growth potential of Shopify's e-commerce services.
I wouldn't rush to buy either of these stocks right now. But if I had to choose one over the other, I'd stick with Shopify because it's growing faster, making bolder decisions, and its business model seems more disruptive.
