Cathie Wood is a big believer in disruptive innovation. Her asset management company, Ark Invest, offers several funds constructed around transformational technologies like robotics, genomics, and artificial intelligence. Ark also manages a fund dedicated to next-generation internet products like cloud computing and streaming entertainment.

Of course, Netflix introduced streaming content over 15 years ago, so the novelty has worn off for many investors. But Ark still sees tremendous upside. Roku (ROKU 1.38%) is its third-largest holding, and Ark analysts believe the stock could reach $1,493 per share by 2026, a target that implies a 1,935% upside from its current share price. 

Here's what investors should know.

Roku is the most popular streaming platform

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 three geographies that its platform powered 30.5% of global streaming time in the second quarter of last year -- nearly double the market share held by the next closest competitor, Amazon Fire TV.

Roku OS is also the best-selling smart TV operating system in the U.S., Canada, and Mexico, hinting at brand authority. One reason for that success is the unique engineering behind the software. As the only operating system purpose-built for televisions, Roku OS theoretically offers a better user experience than competing software, like Amazon Fire OS and Apple tvOS. Indeed, Roku devices suffer fewer video start failures than other devices, and they are tied for the lowest buffering rate, according to Conviva.

So what? Roku engages viewers more effectively than its peers, and the company is well-positioned to retain its leadership among streaming platforms. That makes Roku a valuable advertising partner for brands, which puts the company in front of a massive market opportunity. Analysts at BMO Capital Markets estimate that connected TV ad spend in the U.S. alone will grow by 17% annually to reach $100 billion by 2030. And Omdia analysts believe online video ad revenue will increase by 14% annually to reach $362 billion worldwide by 2027.

Ark's valuation model covers a range of outcomes

Last June, Ark Invest published a valuation model for Roku that outlines three possible scenarios: (1) The bull scenario prices the stock at $1,493 per share by 2026 (1,935% upside), (2) the base scenario prices the stock at $605 per share by 2026 (725% upside), or (3) the bear scenario prices the stock at $100 per share by 2026 (36% upside).

In the bull scenario, Ark assumes Roku will have 186 million active accounts in 2026, up from 71.6 million last quarter. That implies annualized growth of 29%, an acceleration from 17% growth last quarter. Ark also assumes Roku will generate $32.1 billion in revenue in 2026, up from $3.1 billion over the last year, implying annualized growth of 87%, a material acceleration from annualized growth of 36% over the last three years.

In the base scenario, Ark assumes Roku will have 157 million active accounts in 2026, implying annualized growth of 23%. Ark also assumes Roku will generate $14.4 billion in revenue in 2026, suggesting annualized growth of 51%. Those forecasts are a little more modest than the bull scenario but still assume a significant acceleration in active accounts and revenue growth.

In the bear scenario, Ark assumes Roku will have 117 million active accounts by the end of 2026, implying annualized growth of 14%. Ark also assumes Roku will generate $3.6 billion in revenue in 2026, indicating annualized growth of 4%. Those forecasts assume a somewhat significant deceleration in active accounts and revenue growth.

Investors should temper their expectations

The bull and base scenarios outlined by Ark seem too optimistic, and the bear scenario seems too pessimistic. I believe the truth lies somewhere between the bear and base scenarios. If I'm right, the stock could climb anywhere from 36% to 725% by 2026, which implies annual returns that range between 9% and 83%. That gives Roku a great shot at beating the market, given that the S&P 500 tends to return about 10% annually.

Building on that, shares currently trade at 3.2 times sales, a bargain compared to the three-year average of 12.3 times sales. At that valuation, investors should consider buying a small position in this growth stock.