The stock market is in the midst of a remarkable comeback after enduring its worst performance since 2008. The S&P 500 is up 19% so far this year, while the tech-heavy Nasdaq Composite is up 37% through July. A number of technology stocks -- which were punished mercilessly during the downturn -- have come roaring back but are still well below their pre-downturn highs.
One such stock is Roku (ROKU -10.29%). The streaming pioneer has gained 137% thus far in 2023 but is still 80% off its peak. It's unsurprising, then, that Ark Investment Management's Cathie Wood believes the rally has just begun, with the potential for the stock to climb to $605 by 2026, representing an additional upside of 528% even after this year's stunning rally.
Let's review several factors that could help propel Roku stock higher.
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Strong secular tailwinds
The ongoing decline of cable and broadcast television is well-documented, but investors might be surprised to find that cord-cutting is accelerating. In the first quarter of 2023, the largest pay-TV providers, including cable and satellite services, lost more than 2.2 million subscribers -- more than any previous quarter, according to data compiled by Leichtman Research Group.
Those defections have helped drive Roku's growth as viewers turn to streaming for their in-home entertainment. In the second quarter, global streaming hours on Roku's platform grew 21% year over year, even as traditional TV viewing declined 13%, according to data from Nielsen.
Further fueling Roku's results was an ongoing shift in advertising to streaming platforms. The company noted that ad spending on traditional TV declined 9% year over year, while the spot market fell 17%. In contrast, Roku's platform revenue -- which is primarily advertising -- increased 11%. This suggests Roku is stealing ad dollars from traditional broadcast and cable TV.
Ark Investment Management cited these factors as evidence that Roku is "disrupting traditional TV viewing."
Increasing engagement
Even in the face of economic headwinds, Roku has continued to grow its audience and increase engagement. In the second quarter, Roku's active accounts climbed to 73.5 million, up 16% year over year. Helping drive this trend is the reach of the Roku operating system (OS).
Not only does the company license the Roku OS, but it also recently released its own line of streaming television sets, which, by all accounts, has been an enormous success. In a shareholder letter, management noted that the Roku OS was the "No. 1 selling TV OS in the U.S., and year to date our TV unit share was larger than the next three largest TV OSes combined," citing data from Circana. The company pointed to year-over-year share gains "across the full range of TV screen sizes," but larger screens were the standout, up more than 70%.
The growing engagement is clear. The average Roku viewer watched 3.75 hours of streaming programming per day during the quarter, up from 3.6 hours in the prior-year period. This shows that once viewers use Roku's platform, it becomes sticky, and viewership increases over time.
It gets better. Streaming hours on The Roku Channel -- the company's homegrown viewing choice -- grew 50% year over year, increasing to 1.1% of total U.S. TV viewing in May, or 3% of streaming hours, according to Nielsen. That puts The Roku Channel in rarefied company, in the same league as Comcast's Peacock and Warner Bros. Discovery's Max.
Will Roku go higher from here?
There's simply no way to know for sure how Roku will fare going forward. The stock has barreled ahead so far this year and appears set for additional gains. However, if Roku's account growth were to reverse course, the stock could turn south -- at least in the short term.
Investors should, however, focus on the longer term and the secular tailwinds that are helping to fuel Roku's ongoing success. Ark CEO Cathie Wood is looking well into the future, suggesting that Roku stock will soar 528% and hit $605 by 2026. Her bull case is even more eye-catching. If the stars align and Roku executes flawlessly (if there is such a thing), Ark suggests the stock could reach as high as $1,493, an increase of more than 1,450%.
There's the really good news. At just 3 times next year's sales, Roku is selling for a song -- and that's after more than doubling this year. The digital advertising market is beginning to show signs of life, which could propel Roku stock to the next level. As a longtime Roku bull, I'm as convinced as ever that the company's steady, consistent growth in the face of headwinds shows Roku has what it takes to go the distance.
