1 Growth Stock With 850% Upside, According to Cathie Wood

ARK Invest CEO Cathie Wood has never shied away from bold predictions. In February 2018, she put a $4,000 per-share price target on Tesla stock. That was before the split, but that price target implied a market cap of $720 billion. That prediction turned heads on Wall Street because Tesla was worth just $60 billion at the time. Not many analysts swing for the fences like that.

In hindsight, it appears Wood made the right call. Tesla is currently valued at $810 billion, and its market cap actually surpassed $1.2 trillion last year. The relative accuracy of the call has some investors wondering about another bold valuation model that ARK Invest recently published. This new report puts Roku (ROKU -1.60%) stock at $605 per share by 2026, implying an 850% upside.

Does Cathie Wood's prediction make Roku stock a buy?

Roku is the most popular streaming platform

In 2008, Roku made history when it introduced the first streaming device. The company has since parlayed its first-mover status into a strong market position. Today, it is the leading streaming platform in the U.S., Canada, and Mexico as measured by viewing time. In fact, the company holds such a dominant position in those markets that its platform powered 31% of global streaming time in the first quarter, nearly double the market share held by the next closest competitor.

Roku owes much of that success to Roku OS, the only operating system purpose-built for televisions. Other platforms employ modified mobile operating systems, which makes for a less enjoyable viewer experience. For instance, Roku saw fewer video-start failures than any competitor in the first quarter, and it tied for the lowest buffering rate.

That reputation for quality has enabled Roku to license its operating system to a growing number of television manufacturers, helping the company get its platform in front of more users. But Roku is also driving active account growth and engagement with its own ad-supported streaming service, The Roku Channel.

The Roku Channel features thousands of free movies and shows, as well as hundreds of live linear channels across news, sports, and entertainment. The company also started adding original content to The Roku Channel last year, supercharging its popularity.

The service currently ranks as one of the top five channels on the platform. That's particularly exciting because Roku owns all of that ad inventory, meaning The Roku Channel is a big monetization opportunity.

The growth engines are firing

Roku makes money through digital payments and digital advertising. It keeps 20% of every transaction processed by Roku Pay, the tool used to purchase content on the platform. Roku also takes 30% of ad inventory from ad-supported services, which it then sells to advertisers.

In 2019, the company strengthened its ability to monetize digital ads when it acquired demand-side platform (DSP) DataXu. That DSP is now called OneView, and it helps marketers run targeted campaigns across connected televisions, mobile devices, and desktops. That means Roku can monetize ad transactions even when it does not own the inventory, and when those ads do not appear on its platform.

Together, Roku Pay and OneView have helped Roku capitalize on its strong market presence, the company has churned out impressive top-line results over the past few years, and free cash flow is trending in the right direction.

Data source: Roku SEC Filings, YCharts. TTM = trailing-12-months. CAGR = compound annual growth rate.

As a caveat, Roku is currently battling several headwinds that have blunted growth. Revenue rose just 18% in the last quarter, and the company posted a GAAP loss of $0.82 per diluted share, down from a profit of $0.52 per diluted share in the prior year. Those disappointing results reflect the impact of a tough macroeconomic environment. Consumer spending is under pressure and advertisers are cutting budgets, but those headwinds should ease as inflation normalizes.

Turning to the future, the company sits in front of a massive market opportunity. Global digital ad spend is expected to hit $820 billion by 2025, and $259 billion of that total will go toward ad-supported video services, according to Omdia. Roku, as the most popular streaming platform, is well positioned to take advantage of that.

As a caveat, investors should monitor growth in active accounts and streaming hours to make sure Roku stays on the right track, and Cathie Wood's price target might be ambitious. But with shares trading at 3 times sales -- the cheapest valuation in the past three years -- now is a great time to buy this growth stock.