Ark Invest is an asset management company focused on disruptive technologies like robotaxis, streaming media, and blockchain. Bold market-related predictions from the firm and its founder, Cathie Wood, have led to a somewhat polarizing reputation. Some investors are diehard fans of Ark favorites like Tesla, Coinbase Global, and Roku (ROKU -10.29%), but others see the firm as a meltdown waiting to happen.

Regardless, Ark is having an excellent year. Its flagship Ark Innovation ETF (ARKK 1.05%) gained 62% through the first seven months of 2023 due in part to triple-digit returns from Tesla, Roku, and Coinbase (its three largest holdings). But the firm still sees plenty of upside on the horizon.

For instance, Ark forecasts Roku could reach $1,493 per share by 2026, a target that implies a 1,475% upside from its current price. Should that prediction pan out, $6,350 invested in Roku stock today would be worth $100,000 in less than four years.

The investment thesis for Roku

Roku reported mixed results in the second quarter. Active accounts rose 16% year over year to 73.5 million, and streaming hours jumped 21% year over year to 25.1 billion, a solid number given that traditional TV viewing time in the U.S. fell 13%. In turn, revenue rose 11% year over year to $847 million, and Roku reported a generally accepted accounting principles (GAAP) loss of $108 million, a slight improvement from the $112 million it lost in the same period last year.

Those results may not inspire confidence, but investors need to remember that many brands pared back their ad budgets this year due to macroeconomic uncertainty. Indeed, the market leader Alphabet saw ad revenue rise just 3% year over year in the second quarter. But Roku is well positioned to reaccelerate growth when ad spending rebounds.

The investment thesis centers on the growing popularity of connected TV (CTV): Roku is the most popular streaming platform in the U.S., Canada, and Mexico as measured by engagement time, and Roku OS is the top-selling smart TV operating system in the U.S. and Mexico. In other words, the company has a strong foothold in an industry poised for rapid growth.

According to GroupM, CTV ad spend is expected to reach $25.9 billion in 2023, but that figure represents just 16% of total TV ad spend, a very small portion given that consumers are rapidly migrating away from traditional TV. Common sense says CTV ad spend will grow quickly in the years ahead. Indeed, BMO Capital Markets estimates that CTV ad spend in the U.S. alone will increase by 15% annually to reach $100 billion by 2030. Roku is set to benefit from that trend, given its position as the most popular streaming platform in North America.

Ark's valuation model for Roku

In July 2022, Ark published a valuation model for Roku that details three possible growth trajectories through 2026. The bull case prices the stock at $1,493 per share, implying a 1,475% upside. The base case prices the stock at $605 per share, implying a 540% upside. And the bear case prices the stock at $100 per share, implying a 6% upside.

Here's a closer look at each scenario.

The bull case: Ark assumes Roku will have 186 million active accounts by the end of 2026, implying annual growth of 30% in the interim. The bull scenario also assumes 43% of streaming hours will be allocated to ad-supported content, allowing Roku to earn $32.1 billion in revenue. For context, Roku collected $3.2 billion in revenue over the trailing 12 months, so Ark's bull case implies annual revenue growth of 93% through 2026 -- a material acceleration from what Roku reported in the most recent quarter.

The base case: Ark assumes Roku will have 157 million active accounts by the end of 2026, implying annual growth of 24% in the interim. The base scenario also assumes 35% of streaming hours will be allocated to ad-supported content, allowing Roku to earn $14.4 billion in revenue. That implies annual revenue growth of 54% through 2026 -- another material acceleration from the most recent quarter.

The bear case: Ark assumes Roku will have 117 million active accounts by the end of 2026, implying annual growth of 14% in the interim. The bear scenario also assumes 28% of streaming hours will be allocated to ad-supported content, allowing Roku to earn $3.6 billion in revenue. That implies annual revenue growth of 3% through 2026 -- a material deceleration from what Roku reported in the most recent quarter.

Roku stock is worth buying, but quadruple-digit returns by 2026 are highly unlikely

I'll be as blunt as possible. The bull case is nonsensical, the base case is overly optimistic, and the bear case is overly pessimistic. I think the truth lies somewhere between the base and bear scenarios. So Roku shareholders that expect quadruple-digit returns by 2026 will almost certainly be disappointed.

Yet, this spectacular growth stock is still worth buying. Roku has a strong market presence in an industry primed for rapid expansion, and shares currently trade at 4.2 times sales, an absolute bargain compared to the three-year average of 11.9 times sales.