Best Stock to Buy Right Now: Roku vs. Shopify

Roku (NASDAQ: ROKU) and Shopify (NYSE: SHOP) both experienced major growth spurts during the pandemic in 2020 and 2021. More people stayed at home and streamed videos through Roku's devices, while more shoppers made online purchases through Shopify-powered stores. Those catalysts, along with the buying frenzy in growth and meme stocks, drove both stocks to their all-time highs in 2021.

But both companies struggled as those temporary tailwinds dissipated. Inflation and rising rates exacerbated that pressure by curbing consumer spending and compressing the companies' valuations. That's why Roku and Shopify now trade about 84% and 52% below their record highs, respectively. Should you buy either of these beaten-down stocks as interest rates decline and the macro environment warms up again?

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Roku might be passing its cyclical trough

Roku generates most of its revenue and all of its gross profits from Roku OS, the software platform that runs on its own hardware and third-party devices. Most of that revenue comes from the platform's integrated ads and its ad-supported Roku Channel. It generates a smaller percentage of its revenue from its devices business, which sells its streaming devices and smart TVs at negative gross margins to tether more users to its software platform.

Roku's revenue rose 58% in 2020 and 55% in 2021. But after its pandemic-driven growth spurt ended, its revenue only grew 13% in 2022 and 11% in 2023. It also turned unprofitable in 2022 as its device gross margins turned red, the macro headwinds curbed its pricing power in the advertising market, and it ramped up its spending on original content. As a result, its net loss widened in 2023 on a generally accepted accounting principles (GAAP) basis.

The bears claimed Roku would struggle as Amazon (NASDAQ: AMZN), Apple, Alphabet's Google, and other bigger tech challengers carved up the fragmented streaming market. Indeed, the stock fell sharply after its most recent quarterly report on fears of slowing growth. But the bulls will point out that its number of streaming households and streaming hours still grew 13% and 20% year over year to 85.5 million households and 32 billion hours, respectively, in its latest quarter. That consistent expansion indicates Roku's ecosystem is sticky -- and it should still profit from the long-term growth of the ad-supported streaming video market. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow (FCF) also turned positive in 2023 as it streamlined its spending.

Through 2026, analysts expect Roku's revenue to grow at a compound annual growth rate (CAGR) of 13%, as its adjusted EBITDA soars at a CAGR of 363% and it narrows its GAAP net losses. Based on these expectations and its enterprise value of roughly $8 billion, Roku's stock looks reasonably valued at less than 2 times next year's projected sales.

Shopify's prospects are also brightening

Shopify provides self-serve e-commerce tools that help merchants quickly launch their own e-commerce websites, process payments, fulfill orders, and manage their own marketing campaigns. It's a popular choice for smaller businesses that don't want to tether themselves to a big third-party e-commerce marketplace like Amazon.

Shopify's revenue soared 86% in 2020 and 57% in 2021. But after the lockdowns ended and more brick-and-mortar stores reopened, its revenue grew 21% in 2022 and 26% in 2023. Those growth rates were robust, but they couldn't support its nosebleed valuations. When its stock reached its record high in late 2021, its enterprise value hit $206 billion -- which was 37 times the revenue it would generate in 2022. That set it up for a steep decline as rising interest rates drove investors toward more conservative stocks. But in 2023, Shopify's growth in gross merchandise volume (GMV) and gross payment volume (GPV) accelerated again as the macro environment stabilized. It also returned to profitability for the year after it divested its capital-intensive logistics division.

Through 2026, analysts expect Shopify's revenue to grow at a CAGR of 22%, as its GAAP earnings per share grow at a CAGR of 141%. That growth should be driven by its new generative AI tools, the expansion of its Shop Pay payments platform and Shop Cash rewards program, and the introduction of more point of sale (POS) hardware devices, cross border commerce tools, and credit and expense management services. The integration of Amazon's "Buy with Prime" buttons into its own stores could complement that expansion as Shopify drives more orders through the e-commerce giant's fullfilment network.

With an enterprise value of $98 billion, Shopify doesn't look like a screaming bargain at nine times next year's sales -- but it's a lot more reasonably valued than it was in late 2021.

The better buy: Shopify

Shopify's stock is pricier than Roku's, but it's growing faster, faces fewer direct competitors, and is generating stable GAAP profits. That makes it a better buy than Roku, which still faces an uncertain long-term future as the ad-supported streaming video market evolves and matures. If Roku can't keep up with those changes, its growth could stall out as it falls behind its streaming rivals and big tech competitors.

Should you invest $1,000 in Roku right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon and Apple. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Roku, and Shopify. The Motley Fool has a disclosure policy.