The past couple of years have been tough, as high inflation and rising interest rates hobbled consumer and business spending alike. The tide appears to have turned in recent months, suggesting there's light at the end of the tunnel. One such forward-looking indicator is the performance of the major market indexes, which have each gained 20% or more from their trough, with some market prognosticators hailing that progress as the coming of the next bull market.
Investors have been taking this as an opportunity to scoop up quality stocks at attractive prices before the bull market really starts to run. One stock analysts are particularly bullish about is Roku (ROKU 1.18%). The streaming platform is without equal in North America and is among the most used streaming platforms in the world, yet the stock is still down 84% from its peak. If Wall Street is right, however, it could soar as much as 1,800% by 2026.
Image source: Getty Images.
There's lots of growth where that came from
Over the past couple of years, those invested in the streaming-video market have been spooked by the decelerating growth that accompanied the economic downturn. However, investors would do well to remember the adage: "This too shall pass." Evidence reveals the existence of a large, untapped market.
The ongoing deterioration of the cable TV industry is well-documented, and cord-cutting has reached epic proportions. Over the past year, the major pay-TV providers have lost a combined 5.4 million subscribers, compared to a loss of 4.2 million during the prior-year period, according to data compiled by Leichtman Research Group. Logic suggests former cable subscribers will turn to streaming video for their viewing needs, and there's evidence that supports that contention.
Streaming video accounted for a record 38.7% of total television viewing in July, according to Nielsen's The Gauge report. Cable and broadcast television both lost share, falling to 29.6% and 20.0%, respectively.
Furthermore, the Roku Channel -- the company's ad-supported offering -- joined an elite group of streamers, accounting for 1.1% of all television viewing, after becoming just the third free, ad-supported television (FAST) service with enough viewers to be included in the report. For context, the others are Fox Corp's Tubi and Paramount Global's Pluto TV, with 1.4% and 0.9%, respectively.
The numbers don't lie
While estimates vary, it's clear that Roku is the undisputed champ in terms of penetration. Roku remains the most popular streaming platform worldwide with 23% of all devices globally, according to Conviva's 2022 State of Streaming report.
This is anchored by its domination of the North American market, controlling 50% of all open programmatic connected-TV ads -- as much as all of its competitors combined -- according to data compiled by Pixalate. Roku also controls 44% of the Latin American market.
The data illustrates that Roku is the clear market-share leader, which will continue to benefit the company and its investors.
The tide is turning
It's well documented that ad spending gets dialed back during a tough economy, which has weighed on Roku's fortunes over the past couple of years, since the vast majority of its revenue comes from the 30% cut it gets from advertising displayed on its streaming platform.
The evidence suggests that the worst has passed. In the second quarter, Roku's total net revenue grew 11% year over year, up from just 1% growth the previous quarter. Furthermore, active accounts of 73.5 million grew 16% year over year, while streaming hours of 25.1 billion climbed 21%. This suggests that Roku's viewer engagement continues to rise. Once the advertising market recovers in earnest -- which has likely already begun -- Roku's digital ad business will follow suit.
Roku is quickly gaining share in the connected-TV market, which will help supercharge its growth. It closed out last year as the No. 1 selling smart-TV operating system in the U.S., Canada, and Mexico and continued to gain share this year. In the U.S., it controls more share than its next three rivals combined and was the No. 1 seller in Mexico for the third-consecutive quarter.
Wall Street is increasingly bullish on Roku
Many on Wall Street believe Roku's best days are ahead of it too. According to a consensus estimate of 33 analysts covering Roku, the stock has a median price target of $85. This suggests potential gains for investors of about 13% over the coming year compared to Roku's current price (as of this writing). Of the 33 analysts who cover Roku, 13 rate it a buy or strong buy, and only two recommend selling, citing the post-earnings price spike.
However, ARK Investment Management CEO Cathie Wood has a much longer-term view, suggesting that Roku stock will surge over 700% and hit $605 by 2026. But Ark's bull case is even more astounding, suggesting the stock could climb as high as $1,493, soaring more than 1,800%. While that estimate may be pie-in-the-sky, I have no doubts it's directionally accurate.
Yet, for all that potential, Roku stock is dirt cheap, selling for less than 3 times next year's sales, still near its lowest valuation ever.
With viewers deserting cable at a record pace, Roku's large and growing audience combines with a deeply discounted valuation to make now the time to buy Roku in advance of the inevitable recovery.
