Shares of video streaming platform Roku (NASDAQ:ROKU) climbed sharply higher on Tuesday, driven primarily by an analyst's decision to boost his 12-month price target for the stock from $275 to $414. The analyst thinks the company is set to benefit from improving average revenue per user thanks to marketers moving their budgets from traditional television to connected TV (CTV).

Here's why the analyst's optimism for this growth stock may make sense.

A couple watching TV together.

Image source: Getty Images.

A key catalyst for Roku in 2021

There's a big runway for the CTV operating system specialist's average revenue per user (ARPU) in 2021, said Wells Fargo analyst Steven Cahall in a note to investors on Tuesday. He says the stage for 2021 was set during 2020, when there was a push into ad-supported streaming services, and when the advertising opportunity in CTV compelled marketers to prioritize the channel. Roku, with its smart TV operating system taking a cut from subscriptions and ads on its platform, is positioned to benefit from these trends.

Notably, even though marketers increasingly turned to CTV during 2020 as an opportune advertising channel, growth in the category still slowed since marketers' total ad budgets took a hit during the pandemic. While this was a cause for concern for many advertising-focused business models in 2020, 2021 will likely be characterized by a reacceleration across advertising channels as the global economy reopens. This will especially be the case for advertising channels that have gained incremental attention during the pandemic like CTV.

In 2020, Roku's average revenue per user has decelerated from pre-pandemic year-over-year growth rates of 29% to levels around 20% more recently.  But this key metric is likely about to tick higher, as monetized ad impressions on Roku's platform were reaccelerating in Q3, growing at a rate of 90% year over year -- up from 50% growth in Q2. 

With total ad spend budgets increasing again and more marketers accelerating their shift from traditional television advertising to CTV, 2021 truly could mark impressive ARPU growth for Roku. 

A Roku-powered TV in an apartment living room

Image source: Roku.

24% upside?

With this backdrop in mind, Cahall's forecast for 24% upside in the stock price (from its $335 price today) sounds reasonable. Given its trailing-12-month year-over-year revenue growth rate of 55% and a recent reacceleration in monetized ads on the Roku platform, the company has some incredible momentum. There's good reason to believe it will continue in 2021.

Investors shouldn't give too much credence to analysts' 12-month price targets, however, as near-term price fluctuations can be influenced by many unpredictable factors. Over the long haul, however, it wouldn't be surprising to see significant growth in Roku's business -- enough to support strong share price appreciation over the next five years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.