Once a company's revenue growth starts to fade, it's tempting to think it will steadily decline until the business is irrelevant. However, Pinterest (PINS 4.04%), Roku (ROKU -10.29%), and Shopify (SHOP 1.11%) are showing renewed signs of life. All three have already reported financial results for this earnings season, and each actually saw a reaccelerated revenue growth rate. That's no easy feat.
So what does this all bode for these companies' upcoming quarters? And would they make good investments from this point forward? Here's what I think.
1. Pinterest
Image-browsing platform Pinterest was once a highflying growth stock, but it's now down more than 60% from its all-time high. It reached its high in 2021 when its top line grew at a triple-digit pace. But by the fourth quarter of 2022, the company's revenue grew at just a 4% year-over-year rate, causing the market to give up on it.
Pinterest is putting together a new narrative in 2023. The company had year-over-year revenue growth of 5%, 6%, and 11% in the first, second, and third quarters, respectively. And in the upcoming fourth quarter, management says revenue could be up by 13%. In other words, Pinterest's growth rate has accelerated for three consecutive quarters, and management expects the streak to continue next quarter.
Pinterest generates revenue from displaying ads on its platform. And ad prices are surprisingly still down. But the company has made up for low ad prices, in part, with user growth, which is quite encouraging.
Here's the part that should make investors pay attention: Pinterest's biggest catalyst for growth hasn't even happened yet. The company recently announced a partnership with Amazon, but management said it will take multiple quarters to roll out. The biggest benefits of the partnership won't come until early 2024.
With this partnership, Pinterest is allowing third-party Amazon ads, which can boost Pinterest's revenue while reducing expenses. And if the partnership is successful, Pinterest can look to onboard even more third-party ad partners. Therefore, it's quite possible the company's growth will keep speeding up beyond 2023.
2. Roku
Roku is a downtrodden growth stock just like Pinterest, with shares off by more than 80% from their all-time highs. For its part, the streaming-TV platform also experienced extreme top-line growth in 2021 only to see that growth steadily decline in 2022. It hit its low point in the first quarter of 2023, with revenue up a paltry 1% year over year.
Roku has put together two quarters of reaccelerated growth now. Second-quarter revenue was up by 11% and third-quarter revenue by 20%.
It's good that Roku's growth is rebounding. However, investors might want to get more excited about Pinterest's rebound than Roku's for a couple of reasons. First, TV advertising is still weak, even though Roku is outperforming many of its peers. Consequently, fourth-quarter revenue is only expected to increase by 14%, down from its 20% growth in Q3.
Moreover, Roku's losses are increasing, even though revenue growth is reaccelerating. This is happening for two reasons. First, the company sells its devices at a loss. Year to date, device revenue is up 20% from the comparable period of 2022, whereas its higher-margin platform revenue is only up 9.3%. Additionally, its gross margin for platform revenue has dropped substantially in recent quarters.
The end result is that Roku's year-to-date revenue is up 10.7% from the comparable period of 2022. But its gross profit is up less than 1%, which makes its revenue growth less meaningful for shareholders.
3. Shopify
Finally, Shopify is a downtrodden growth stock as well, with shares down roughly 65% from their highs. And the company followed a similar path to Pinterest and Roku. Growth for the business steadily slowed, and in the second quarter of 2022, Shopify reported its slowest growth as a public company, with total revenues up 16% year over year.
Shopify's reaccelerated growth rate hasn't been steady. But as the chart below shows, the company's recovery is trending in the right direction. Note that the chart doesn't reflect its most recent quarterly results.
SHOP Revenue (Quarterly YoY Growth) data by YCharts. YoY = year over year.
I include Shopify on this list because its Q3 revenue growth of 25% was better than the 22% growth it reported in the same quarter of 2022. Shopify increased its prices for merchants, and the price increases went into full effect on April 23.
Since that happened, the company's profits have skyrocketed. In Q3, its gross profit was up 36% year over year compared to 25% revenue growth. It also generated free cash flow of $276 million compared to negative free cash flow of $148 million in the prior-year period.
Shopify's management expects upcoming fourth-quarter revenue growth to be below 20%. Therefore, like Roku, the company's growth will take a step back. But the company expects its free-cash-flow surge to continue. According to management, Q4 should be its best performance for free cash flow in 2023, which should make shareholders happy.
Picking a downtrodden winner
Of these three stocks, I believe Pinterest is the business improving the most. Whereas I have questions about Roku regarding profitability and about Shopify regarding the sustainability of its growth, Pinterest seems to be excelling at both right now.
To me, the market still isn't appreciating the transformation of Pinterest's business in recent quarters and hasn't seemed to fully grasp the potential of its partnership with Amazon. And that's why it's my clear winner from this trio today.
