Cathie Wood is an expert at identifying innovative companies that have the potential to change the way we live our lives. These company's stocks could produce phenomenal returns for early investors, and they form the basis of her Ark Invest ETFs.

Researchers at Ark believe one of Wood's top picks could see its stock price climb as much as 2,145% from its price at the time of writing. It's a leading name in connected TV and streaming video, and its technology and products underpin the entire industry from distribution to content to ad technology.

While Wood's pick looked like an absolute winner in 2021, the share price has fallen precipitously since reaching an all-time high, down more than 80%. That could mean investors have another opportunity to get into the stock before the price skyrockets, according to Ark's analysts.

The streaming company Ark can't get enough of

Wood and her team at Ark Invest see Roku (ROKU -10.29%) as one of the biggest beneficiaries in the shift from linear TV to streaming.

It's the second-biggest holding in Ark's flagship Ark Innovation ETF (ARKK 1.05%), so investors shouldn't doubt Wood and her team's conviction for the stock.

In an open-source financial model released last year, analysts presented their bear, bull, and base case for Roku shares. In the most bullish case -- which they assign a 25% probability -- the analysts say Roku shares could be worth $1,493 a piece by 2026. The bear case (also a 25% probability) calls for a share price of $100, and the base case models a $605 share price.

The most important factors impacting Roku's stock

In their analysis, Ark's researchers identified four factors as the most important drivers of Roku's valuation:

  • Active accounts
  • Daily hours streamed on Roku devices
  • The percentage of hours streamed on ad-supported video-on-demand (AVOD) platforms
  • Gross and net platform monetization rates

Active accounts

In their base case, Ark's analysts expect Roku to grow active accounts at an annual rate of 23% from 2021 through 2026. That would push its total user base to 157 million accounts.

Over the last year, though, Roku's active accounts grew just 16%. In fact, Roku hasn't grown active accounts at least 23% since 2020 (and we all remember what happened that year).

Roku consistently adds around 10 million or 11 million accounts per year. That's a much better barometer, in my opinion, for how fast it can grow going forward. That would put it at just 113 million accounts or so at the end of 2026 -- slightly lower than Ark's bear case.

Daily hours

Ark sees the daily hours streamed on Roku devices climbing from 3.6 hours per day in 2021 to 4.5 hours per day in 2026.

Roku's making tremendous progress toward that number. Roku users streamed an average of 3.9 hours per day in the first quarter. In the seasonally weak second quarter, Roku saw a minimal decline in engagement per account. As more and more content shifts to streaming services and more consumers cut the cord, Roku is on track to hit Ark's base case target.

Ad-supported hours

The Ark base case also calls for 35% of all streaming on Roku's platform to come from ad-supported video services. That's split between third-party streaming services (20%) and the company's own Roku Channel (15%).

The Roku Channel has produced strong results in 2023. It broke into Nielsen's The Gauge report, accounting for over 1% of total U.S. TV viewing. Still, that's less than 3% of all streaming across all devices. Though The Roku Channel will account for a larger percentage of time spent on Roku devices, expecting it to climb to 15% of all time spent on the platform is aggressive.

That said, more and more time is shifting to third-party ad-supported streaming. As streaming services raise prices on ad-free tiers of service, they're pushing more consumers to opt for ad-supported tiers. As such, the analysts may be underestimating how much time users will spend on third-party ad-supported streaming.

Monetization rates

Combining first- and third-party video ads, display ads on the Roku home screen, and content distribution revenue, the analysts expect Roku to generate about $0.21 in gross revenue per hour of engagement on its platform (in the base case). With a take rate of 20% on third-party streaming services, they expect Roku to net $0.05 per hour overall when combined with time spent on The Roku Channel.

After some setbacks in 2022 and 2023, the company is starting to show a recovery. Platform net revenue per streaming hour was $0.03 in the second quarter. While Ark may expect much of the growth in monetization to stem from growth in The Roku Channel, Roku may instead get a boost from more ad-supported streaming and higher average prices for ad-free streaming. Both will result in more money coming from revenue shares.

Is Roku stock a buy?

Ark's analysts may have some aggressive targets, particularly when it comes to Roku's active user base. Still, it's unlikely anyone will unseat Roku as the leading connected TV platform. Investors might not see a $1,493 share price in the near future, but the company is going to be one of the biggest beneficiaries of the secular trend toward streaming video.

The Ark analysts use a 20x EV/EBITDA valuation. Considering Roku's efforts to cut costs and reaccelerate earnings before interest, taxes, depreciation, and amortization (EBITDA) growth, a higher multiple could be justified in 2026. For reference, shares traded at an EV/EBITDA multiple around 45x in the summer of 2022.

As EBITDA improves in 2024 and beyond, investors should see the stock price recover nicely. It's not too late to buy shares. They still trade nearly 30% below Ark's bear case.