Ark Invest CEO Cathie Wood has been relentlessly optimistic throughout the Nasdaq Composite bear market. Her flagship Ark Innovation ETF is currently down 75% off its high, but she still expects the fund to generate 50% annual returns over the next five years (starting last year) and Wood remains bullish on many beaten-down stocks, including Tesla, Zoom Video Communications, and Roku (ROKU -0.85%), the three largest holdings in the Innovation ETF.

In fact, Ark currently has a 2026 target of $605 per share on Roku, which implies 840% upside from its current price. Here's what investors should know.

Roku is the most popular streaming platform

Roku struggled last year as brands cut their ad budgets to compensate for softening consumer demand brought on by high inflation. Revenue rose just 13% to $3.1 billion, and the company reported a loss under generally accepted accounting principles (GAAP) of $498 million, down from a profit of $242 million in the prior year. Management expects the economic headwinds to intensify in the near term. First-quarter guidance implies a 4% decline in revenue. But economic headwinds are a temporary problem.

The long-term investment thesis for Roku remains intact: Despite tremendous adoption, streaming still accounts for a small portion of TV viewing time, and ad budgets are still skewed toward traditional pay TV. But more consumers cut the cord each year, and ad dollars will undoubtedly follow viewers to connected TV (CTV) platforms. In fact, CTV ad spend in the U.S. alone is expected to reach $100 billion by 2030, according to BMO Capital Markets. Roku is perfectly positioned to benefit from that trend.

Roku is the most popular streaming platform in the U.S., Canada, and Mexico as measured by hours streamed. In fact, Roku is so popular in those markets that it accounted for nearly 31% of global streaming time in the second quarter last year, while the next closest competitor held just 16% market share. That means Roku is engaging viewers far more effectively than its peers, and that makes the company a valuable partner to advertisers.

Roku is well positioned to maintain its leadership. Roku OS is the top-selling smart TV operating system in the U.S., Canada, and Mexico, indicating strong consumer demand for Roku products. That means active accounts should continue to climb. Additionally, Roku hopes to build on that brand authority by launching its own lineup of smart TVs this year. Company-made models will target the higher end of the market, complementing the more affordable models made by manufacturing partners.

Ark's valuation model

In the coming years, Ark believes Roku will maintain its position as the dominant CTV platform connecting viewers, content producers, and advertisers. Its base case valuation model assumes the company will reach 157 million active accounts by 2026, up from 70 million in 2022. That implies 22% annual growth over the next four years, representing an acceleration from 16% growth in active accounts last year.

Building on that, Ark believes Roku will generate $14.4 billion in revenue in 2026, up from $3.1 billion in 2022. That implies 47% annual growth over the next four years, a significant acceleration from 13% revenue growth last year. Ark believes the majority of that revenue will come from online video advertising, a market forecast to grow at 14% annually to reach $362 billion by 2027, though content distribution fees will also comprise a signal portion of total sales.

Finally, Ark estimates Roku will achieve a market cap of $93 billion by 2026, implying a reasonable price-to-sales (P/S) ratio of 6.5. That multiple represents a premium to its current valuation of 2.8 times sales, but it would still be a big discount compared to the three-year average of 12.8 times sales.

Roku stock is worth buying

As a Roku shareholder, I would love to see the stock soar 840% by 2026, but the odds of that happening are remote. Roku would be hard-pressed to achieve 47% annual revenue growth over the next four years even in a booming economy. But risk-tolerant investors with a long time horizon should still consider buying this growth stock.

Roku's position as the leading streaming platform hints at strong growth as the online video advertising market gets larger, especially when the economy eventually regains its momentum.