Cathie Wood, well-known for her momentum-driven investments, has garnered particular attention as the manager of her flagship ARK Innovation ETF (ARKK), which focuses on high-growth, disruptive businesses. Her investment strategy is centered on identifying new and innovative technologies, and companies with the potential for exponential growth.
In this article, we'll look at two growth stocks - Roku (ROKU) and Shopify (SHOP) - that are included in the ARK Innovation ETF's top holdings, reflecting Wood's belief in their ability to lead in the face of industry shifts and technological advancements. ROKU currently holds top weighting in ARKK, at 9.38%, while SHOP is the 11th largest holding, at 3.49%.
Following robust third-quarter earnings, Roku and Shopify stocks both spiked significantly this past week. Let's find out if these growth stocks are good prospects for buy-and-hold investors now.
What Is Roku Doing Right?
Roku is a streaming platform as well as a device manufacturer. It rose to prominence thanks to its user-friendly experience for viewers, and as a platform for content creators to reach their target audiences. The stock has gained an impressive 108% year-to-date, outperforming the S&P 500’s ($SPX) gain of 13.5%.
Roku’s upbeat Q3 results boosted its stock by 30% on Nov. 2. The company’s net revenue jumped 20% year-over-year to $912 million, beating the consensus estimate by $56.3 million.
Roku's platform revenue, primarily from content distribution and video advertising, jumped 18% to $787 million in Q3. Meanwhile, its devices revenue increased 33% to $125.2 million, thanks to the new Roku-branded televisions. It also reported positive adjusted EBITDA for the first time, at $43.4 million.
Roku got serious this year about cutting costs. In September, it announced in an 8-K filing its plans to “implement additional measures to continue to bring down its year-over-year operating expense growth rate." Management stated in the Q3 press release that these cost-cutting strategies, along with strong top-line growth, contributed to achieving positive EBITDA.
Roku is not yet profitable, but if it continues to grow revenue at this pace, the company may soon see green in its bottom line.
Management believes that the video ad market is recovering, and that Roku, with its significant scale and engagement, will be able to achieve positive free cash flow in the near future. The company anticipates $955 million in revenue for the fourth quarter, while analysts predict $969 million in revenue.
Looking ahead, Roku is expected to grow its revenue by 10.3% to $3.5 billion in 2023. Roku has only missed revenue estimates once in the last four years.
What Are Analysts Saying About Roku?
Following the company's third-quarter earnings, Pivotal Research Group analyst Jeffrey Wlodarczak upgraded Roku stock to "hold" from "sell." According to the analyst, "Roku occupies an attractive position in the content ecosystem." In addition, the analyst raised the target price from $58 to $75. Analysts at Wells Fargo, Truist, and many others also raised their target price for Roku after earnings.
Overall, Wall Street rates the stock a “moderate buy.” Out of the 26 analysts covering Roku stock, 9 have a “strong buy” recommendation, 1 suggests a “moderate buy,” and 13 call it a “hold.” The stock also has 1 “moderate sell” and 2 “strong sell” recommendations.
Following its latest surge, ROKU is now trading above the average analyst price target of $82.71 - but based on the Street-high target of $115, the stock could potentially rally as much as 35% from current levels.
What Is Shopify Doing Right?
Despite macroeconomic headwinds and rising interest rates, e-commerce platform Shopify reported better-than-expected Q3 results. The stock closed 22% higher on Nov. 2, driven by strong guidance for 2023. The stock is up an incredible 77% year-to-date.
Shopify's revenue increased by 25.5% to $1.7 billion, exceeding estimates by $44 million. Meanwhile, adjusted earnings per share were $0.24, which outperformed analysts' expectations of $0.14 per share. Shopify’s gross margin also expanded to 52.6% from 48.5% in the quarter.
What’s more, growth across its subscription plans drove a 32% increase in its monthly recurring revenue (MRR) to $141 million.
Shopify also reported a fourth consecutive quarter of positive free cash flow, generating $276 million. Positive free cash flow allows a company to repay debts and fund future growth strategies. It also had $4.9 billion in cash and marketable securities at the end of Q3.
Plus, the company has a new partnership with Amazon, in which the tech e-commerce giant will permit merchants to "offer Buy with Prime directly within their Shopify Checkout." These purchases will be added to Shopify Payments.
Leading up to the holiday season, Shopify expects to wrap up 2023 strong. For the full year 2023, the company predicts revenue to increase by a mid-twenties percentage. Analysts’ prediction is in line with management, at 25% to around $7 billion for the year.
What Are Analysts Saying About Shopify?
Wall Street has a “moderate buy” rating for SHOP. Out of the 36 analysts covering Shopify stock, 14 have a “strong buy” recommendation, 1 suggests a “moderate buy,” and 21 call it a “hold.” Analysts at Wells Fargo, Baird, and Citi raised their target price for SHOP after Q3 earnings.
Based on analysts' average price target of $66.25, Wall Street sees potential upside of about 7.8% in the next 12 months.
The Key Takeaway
Roku has worked hard to increase revenue from its user base and ad business. However, competition in the streaming industry is intense. The company is not yet profitable. Investors should keep an eye on Roku’s ability to both sustain and grow its user base, effectively monetize its platform, and navigate the competitive landscape while achieving profitability.
While the e-commerce platform is equally competitive, Shopify’s revenue growth trajectory is impressive. Its success is rooted in its ability to tap into the burgeoning e-commerce market and provide solutions that are appealing to businesses. As a result, I am now neutral on Roku and bullish on Shopify stock.
That said, while Cathie Wood's strategies have been successful, it’s essential to conduct your own due diligence before investing in these two growth stocks.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
