It's been 18 months since the onset of the bear market, with the economy besieged by high inflation and rising interest rates. Things have gotten incrementally better in recent months, however, providing hope that the worst has passed. And downturns tend to be short-lived, averaging 14 months on average. In fact, the Nasdaq Composite is now just 22% off its peak, close to finally ending its bear market run.
There's more good news: Every bear market in history has been followed by a bull market, which -- on average -- last 60 months. That means that investors that load up on quality stocks now will be rewarded when the inevitable recovery begins.
Analysts are particularly bullish about the potential for Roku (ROKU -1.41%), the world's most widely used streaming platform. In fact, if Wall Street is right, this stock is set to soar 2,700% by 2026.
Image source: Getty Images.
Where will future audience growth come from?
The streaming video landscape has been evolving over the past year or so. Slowing audience growth has some investors fearing the best growth has passed. The evidence suggests, however, that there remains a large, untapped opportunity.
The secular decline of cable TV is gathering steam, and cord-cutting is actually accelerating. The major pay-TV services have lost 5.9 million subscribers in 2022, surpassing the record losses suffered in 2020, according to data compiled by Leichtman Research Group. Logic dictates that all these former viewers will seek a new source for their in-home entertainment needs, and streaming video is the logical beneficiary.
There's more. Streaming video remained the top choice of television viewers in April, accounting for 34% of all TV viewing and outpacing both cable and broadcast TV, according to data compiled to Nielsen. At the same time, broadcast television slumped 3.7% year over year, while cable TV audiences declined 12%.
The numbers don't lie
Not many companies can go toe-to-toe with Amazon and win, but Roku is among that select group. Roku is the most popular streaming device worldwide, with a 23% share of all devices globally, according to Conviva's State of Streaming report. Amazon's Fire TV had roughly half that with 12%.
Roku also offers viewers much more choice in terms of streaming channels on its platform than Amazon. Roku have nearly 37,000 channels in its app store, according to mobile and connected TV app intelligence company 42matters. Amazon's Fire offers only half as many, with about 18,000.
The data helps illustrate that Roku has the inside track in terms of market share and audience appeal, which will help drive its future growth.
Short-term headwinds, long-term opportunity
When the economy slumps, companies frequently scale back spending on marketing -- and this time is no different. The situation has pummeled Roku, since the company makes the lion's share of its revenue from the 30% cut of all advertising shown on its platform.
That was front and center in the company's first-quarter financial report, as platform revenue -- which includes advertising -- declined 1% year over year, even as active accounts grew 17% to 71.6 million and viewing hours of 25.1 billion climbed 20%. This suggests that when the advertising market recovers, which it inevitably will, Roku is poised to rebound.
Furthermore, the company's recent move into the connected TV market provides another way for Roku to increase its strong and growing share of the streaming device market. In fact, the Roku operating system is already the top-selling smart TV operating system in the U.S., with a 43% market share. It also took the top spot in Mexico for the second consecutive quarter.
Wall Street remains bullish on Roku
Like so many technology stocks, Roku has been punished as the result of the economy, even as it continued to grow. Some of Wall Street's best and brightest believe the selling has simply gone too far. According to a consensus estimate of 32 analysts covering Roku, the stock has a median price target of $67. This suggests potential gains for investors of 26% over the coming year compared to Roku's current stock price. Furthermore, of those 32 analysts that cover Roku, 27 rate it a buy or strong buy, and only one recommends selling -- citing the ongoing macro headwinds.
However, ARK Investment Management CEO Cathie Wood is much more bullish and looking further ahead, suggesting that Roku stock will soar 1,058% and hit $605 by 2026. But ARK's bull case is even more eye-catching, suggesting the stock could climb as high as $1,493, surging more than 2,700%. Even if Roku doesn't meet that audacious benchmark, it suggests that the potential is there.
Furthermore, Roku is currently selling for a song, with a price-to-sales ratio of 2, near its lowest valuation ever.
I have been beating the drum for Roku for some time. The company now has a greater audience than all the cable TV providers combined, but continues to suffer the affects of the challenges in the digital advertising market. Once the ad market rebounds, Roku is well positioned to ride that wave to new heights -- that's why I have continue to add to my position throughout the downturn.
With subscribers abandoning cable at a record pace, a deeply discounted valuation, and a rousing endorsement from Wall Street, now seems like a great time to buy Roku stock ahead of the inevitable rebound to come.
