Roku (ROKU 2.53%) And Shopify (SHOP 1.00%) both experienced major growth spurts during the pandemic in 2020 and 2021. More people stayed home and streamed video through Roku’s devices, while more shoppers made online purchases. online through stores powered by Shopify. These catalysts, along with the buying frenzy for growth stocks and meme stocks, have driven both stocks to their all-time highs in 2021.

But both companies struggled as these temporary tailwinds dissipated. Inflation and rising rates have exacerbated this pressure by curbing consumer spending and compressing company valuations. That’s why Roku and Shopify are now trading about 84% and 52% below their record highs, respectively. Should you buy any of these struggling stocks as interest rates fall and the macroeconomic environment heats up again?

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Roku may be breaking its cyclical low

Roku generates most of its revenue and all of its gross profit from Roku OS, the software platform that runs on its own hardware and third-party devices. Most of that revenue comes from in-platform 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 attach more users to its software platform.

Roku’s revenue grew 58% in 2020 and 55% in 2021. But after its pandemic-induced growth spurt ended, its revenue grew only 13% in 2022 and 11% in 2023 It also became unprofitable in 2022 as its device gross margins turned red. , macroeconomic difficulties have limited its pricing power in the advertising market and increased its spending on original content. As a result, its net loss widened in 2023 under generally accepted accounting principles (GAAP) base.

Bears claimed Roku would struggle to Amazon (NASDAQ:AMZN), Apple, AlphabetGoogle and other big tech challengers have carved up the fragmented streaming market. Indeed, the stock fell sharply after its last quarterly report on fears of a slowdown in growth. But the bulls will point out that the number of households and streaming hours still increased by 13% and 20% year-over-year to reach 85.5 million households and 32 billion hours respectively. during his last trimester. This continued expansion indicates that Roku’s ecosystem is fragile and that it still stands to benefit from long-term growth in the ad-supported streaming video market. Its adjusted earnings before interest, taxes and depreciation (EBITDA) and free cash flow (FCF) also turned positive in 2023 by streamlining its spending.

Through 2026, analysts expect Roku’s revenue to grow at a compound annual growth rate (CAGR) of 13%, as its adjusted EBITDA climbs to a CAGR of 363% and it reduces its GAAP net losses. Based on these expectations and its enterprise value of around $8 billion, Roku’s stock appears reasonably valued at less than twice next year’s projected sales.

Shopify’s outlook also improves

Shopify provides self-service ecommerce tools that help merchants quickly launch their own ecommerce websites, process payments, fulfill orders, and manage their own marketing campaigns. It’s a popular choice for small businesses that don’t want to tie themselves to a large third-party e-commerce marketplace like Amazon.

Shopify’s revenue soared 86% in 2020 and 57% in 2021. But after lockdowns ended and more physical stores reopened, its revenue grew 21% in 2022 and 26%. in 2023. Those growth rates were robust, but they couldn’t stand his nosebleed assessments. When its stock hit its all-time high in late 2021, its enterprise value reached $206 billion, or 37 times the revenue it would generate in 2022. That set it up for a sharp decline as rates rose interest pushed investors toward more conservative stocks. But in 2023, Shopify’s growth in gross merchandise volume (GMV) and gross payments volume (GPV) accelerated again as the macroeconomic environment stabilized. It also returned to profitability for the year after divesting its capital-intensive logistics division.

Through 2026, analysts expect Shopify’s revenue to grow at a CAGR of 22%, while its GAAP earnings per share grow at a CAGR of 141%. This growth is expected to be driven by its new generative AI tools, the expansion of its Shop Pay payment platform and its Shop Cash rewards program, as well as the introduction of more hardware point-of-sale devices. sales (POS), cross-border commerce tools and credit and expense management. services. Integrating Amazon’s “Shop with Prime” buttons into its own stores could complement this expansion as Shopify generates more orders through the e-commerce giant’s fulfillment network.

With an enterprise value of $98 billion, Shopify doesn’t look like a bargain with nine times next year’s sales, but its valuation is much more reasonable than it was at the end of 2021.

Best Buy: Shopify

Shopify’s stock is more expensive than Roku’s, but it’s growing faster, faces fewer direct competitors, and generates stable GAAP profits. That makes it a better buy than Roku, whose long-term future is still uncertain as the ad-supported streaming video market evolves and matures. If Roku fails to keep up with these changes, its growth could stall as it falls behind its streaming rivals and larger technology rivals.