Digital media player manufacturer and video streaming platform Roku (ROKU -1.18%) managed to build itself into the world's leading operating system for streaming TV around a popular ad platform that appeals to advertisers, viewers, and content providers alike. The company's growth generally mirrored the state of the digital ad market, which prospered during the pandemic but slowed as potential viewers returned to focusing on offline activities.

Roku's stock also mirrored the market with periods of considerable growth and massive declines since its 2018 initial public offering. At the moment, the entertainment stock is down about 83% from its all-time high in mid-2021. Going forward, there is good reason to believe it has suffered its period of decline and it has what it takes to surge much higher over the next three years.

The state of Roku's stock

Admittedly, Roku stock is still recovering from the 2022 bear market. A slump in ad sales turned rapid revenue growth into declines, meaning it had only a short-lived move to profitability. Still, Roku has returned to revenue growth. In the first half of 2023, revenue reached $1.6 billion, a 6% increase compared with the first two quarters of 2022.

However, operating expenses increased 23% over the same period, with all expense categories rising faster than revenue. Consequently, its net loss actually increased, with losses for the first two quarters of 2023 coming in at $301 million, up from $139 million in the same period last year.

But even with that setback, its financials are on track to improve. The company forecasts $815 million in revenue for the third quarter, a 17% yearly increase if the prediction holds. Additionally, its price-to-sales (P/S) ratio stands at 4. While not a record low, that makes its valuation comparable to five years ago, right before the stock experienced three years of massive increases.

The path to growth

But even while the path to profit recovery looks uncertain, Roku is making itself more receptive to growth when it finally recovers. This is because Roku continues to capitalize on the secular move from traditional TV to streamed TV. As of May, streaming now claims 36% of the television market. This exceeds cable's 31% and the 23% share for broadcast TV, according to The Guage, a report put out by Nielsen.

Roku now claims almost 74 million active accounts, growing 16% over the last year. Over the same period, streaming hours rose 21% to more than 25 billion. This means when the slump in the ad market ends, Roku can sell more ads and draw more revenue.

One of the more notable and optimistic forecasts comes from a key Roku shareholder, Cathie Wood's Ark Invest. Ark Invest analysts forecast a $605-per-share stock price sometime in the next three years. That's a more than sevenfold increase and well above the all-time high of just over $490 per share set in mid-2021.

Ark Invest's forecast stock surge would occur as yearly revenue, which was just over $3 billion in 2022, rises to $14 billion by 2026. Massive increases in ad revenue and content distribution would drive that increase.

Admittedly, the prediction included a bear forecast, which at $100 per share is just a 27% increase from the current $79-per-share price. But this is the same investment firm whose optimistic predictions on Tesla and Bitcoin became reality, so investors have some reason not to dismiss Wood and her team.

Roku in three years

Given Roku's work to build its ecosystem, it can certainly beat the market over the next three years. Admittedly, slow revenue growth and rising losses could make investors doubt more optimistic predictions. And even Ark Invest admitted the possibility of its targeted price not being met.

However, Roku's user base and time on the platform continue to grow. As more customers switch to streaming, the stock could move significantly higher as a renewed interest in advertising helps it resume growth.