While a debate rages concerning the current state of the economy, one thing is sure. Every single bear market in history has been followed by an even more robust bull market -- and there are signs it may already have begun.
Either way, investors still have the opportunity to snap up shares of beaten-down stocks, and Roku (ROKU -10.29%) is one particularly compelling example. The streaming platform is unparalleled in North America and is one of the world's most widely used streaming platforms, but the stock is still down 85% from its high.
However, superstar investor Cathie Wood of ARK Investment Management predicts the stock is poised to soar 730% by 2026. Let's take a closer look at the company's prospects.
Image source: Getty Images.
The opportunity is far from over
The events of the past couple of years have convinced bearish investors that stagnant growth is the new normal for the streaming video market. Yet the evidence suggests those dour predictions may be missing the forest for the trees.
Cable television is suffering from a secular downturn that continues to accelerate, with viewers cutting the cord at record levels. The major pay-TV providers shed a combined 5.9 million subscribers last year -- the highest on record -- according to data compiled by Leichtman Research Group, and the industry is on pace to endure even greater losses this year.
Instead, viewers are increasingly turning to streaming video for their in-home entertainment needs, which spells good news for Roku. Streaming video accounted for 38.3% of total television viewing in August, up from 31.3% in the year-ago period, according to Nielsen's The Gauge report. Cable and broadcast television have both lost share over the past year, down 12.5% and 7.7%, respectively.
At the same time, the Roku Channel accounted for 1.1% of all television viewing, one of just three free, ad-supported television (FAST) services with enough viewers to make the report. The others are Fox Corp's Tubi and Paramount Global's Pluto TV. This data supports the conclusion that viewers who ditch cable and broadcast TV are turning to Roku for their entertainment fix.
The evidence is compelling
Helping fuel Roku's audience growth is the company's streaming device strategy. Roku represents 23% of all streaming devices worldwide, according to video analytics provider Conviva. This helps fuel the company's digital advertising. Roku devices saw 45% of all open programmatic connected TV ad sales in the second quarter, according to data compiled by Pixalate.
The data shows that Roku is the unrivaled market leader in terms of both streaming device penetration and the resulting connected TV ad sales.
This too shall pass
The economic headwinds of the past couple of years have resulted in a commensurate decline in digital advertising, which has hit Roku hard. The lion's share of the company's revenue comes from the 30% cut it receives from advertising shown on its streaming platform. Yet even as the economy continues the long path to recovery, things are beginning to look up.
In the second quarter, Roku's revenue grew 11% year over year, up from just 1% growth in the first quarter. Perhaps as importantly, the company's active accounts grew 16% to 73.5 million, while streaming hours climbed 21% to 25.1 billion. This points to the increasing engagement of Roku viewers. Once the advertising market returns to form, Roku's digital ad business will reach new heights.
Another strategy that could supercharge its growth is Roku's foray into the the connected TV market. Roku ended 2022 as the No. 1 selling smart TV operating system in the U.S., Canada, and Mexico and continues to gain share. So far this year, it controlled more share than its next three rivals combined in the U.S. and was the No. 1 seller in Mexico for the third consecutive quarter.
Wall Street and Cathie Wood are bullish on Roku
Some of the best and brightest on Wall Street believe there are better days on the horizon for Roku. Of the 34 analysts who cover Roku, 12 rate it a buy or strong buy, and only two recommend selling -- citing the stock's current valuation in light of its recent rebound from all-time lows. Analysts have a consensus price target on Roku stock of $84. This suggests potential gains for investors of about 15% over the coming 12 months.
However, Wood continues to play the long game and is looking much further ahead. The base case of her research concludes that Roku stock will soar 730% to hit $605 by 2026. Yet Ark's bull case is even more eye-catching, predicting that the stock could rocket to $1,493 during the same period. While Roku might not reach these dizzying heights, the stock price could be much higher in the years to come.
When viewed in terms of its growing opportunity, Roku stock is still decidedly cheap -- selling for roughly twice next year's sales. That's its cheapest valuation ever and squarely in bargain basement territory. With television viewers abandoning cable at a record pace, Roku's large and growing user base, a severely discounted valuation, now looks like the time to buy Roku stock ahead of the robust rebound to come.
