Over the past few years, Ark Investment Management's claim to fame has been making big bets on disruptive and emerging technologies, including artificial intelligence, robotics, and autonomous driving platforms. The company is led by enigmatic founder Cathie Wood, who made a name for herself by making early calls on such winning stocks, including Block, Tesla, and Nvidia, among others.
After taking it on the chin in 2022, the ARK Innovation ETF is mounting a comeback. It's generating returns of 31% so far this year, more than double the returns of the S&P 500 (as of this writing). The gains were fueled by impressive performances from Coinbase Global, Roku (ROKU -10.29%), and Tesla, but Wood believes there's much more to come.
One of Ark's most high-profile calls involves Roku, which Wood believes will likely climb to $605 by 2026. That's an upside of 625% compared to Tuesday's closing price. Her bull case is even more eye-opening, calling for the stock to rise to $1,493 per share over the next two years, which would represent gains of 1,690%. How likely are gains of that magnitude, and how should investors view Roku stock going forward? Let's see what the evidence suggests.
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The case for Roku
Roku is the most popular streaming platform in North America, with 50% of the market, according to data analytics platform Pixalate. What's more, Roku is expanding its presence worldwide, with 44% of the market in Latin America and a 14% share in the Asia Pacific region. The ease and convenience of its interface and its expanding device ecosystem, which includes set-top boxes, dongles, and the Roku operating system -- used by a growing number of connected television (CTV) manufacturers -- gives the streaming pioneer a foothold in a growing share of the world's living rooms.
Plus, people are abandoning cable in increasing numbers. A record 5.9 million viewers cut the cord in 2022, according to Leichtman Research Group, and losses are on track to eclipse that number by the time we close the books on 2023. Many of the viewers abandoning cable are turning to streaming video for their home entertainment needs. As the streaming leader, Roku is well positioned to benefit from this secular tailwind.
Engagement among Roku's audience continues to impress. In the third quarter, Roku's active accounts grew 16% year over year to 75.8 million, while streaming hours of 26.7 billion grew 22%. That means the average Roku viewer is spending 3.9 hours each day in front of its devices, up from 3.7 hours in the prior-year quarter. With nearly 76 million active accounts and multiple viewers per household, marketers simply can't ignore Roku's captive audience, which is driving advertising dollars to its streaming platform.
Finally, the decline in broadcast television viewing isn't lost on advertisers, which are beginning to shift ad dollars to streaming. In Q3, as ad spending on traditional broadcast TV fell 23% year over year, ad spending on CTVs -- which support streaming -- increased 39%, according to Standard Media Index (via MarketingDive).
Taken together, these factors help illustrate the case for Roku, which stands to benefit from each of these trends.
The assumptions in Ark's thesis
Ark released its valuation model for Roku in July 2022, suggesting three potential outcomes by 2026. The base case suggests the stock will reach $605 by 2026, which would represent gains of 625%. The bull case suggests that, during the same period, the stock will climb to $1,493, for gains of 1,690%. The bear case suggests a price of $100, suggesting an upside of just 20%.
The thesis is predicated on the number of variables, but Ark believes that the digital advertising shown on Roku's platform will be the biggest contributor to its future success. For example, the base case suggests that Roku's revenue would increase by 39% annually, reaching $14 billion by 2026.
However, in the face of macroeconomic headwinds last year, Roku's revenue grew by just 13% to $3.1 billion, so its growth was already behind the curve. The company is still playing catch-up. Analysts' consensus estimates are calling for revenue of $3.4 billion in 2023, $3.8 billion in 2024, and $4.4 billion in 2025. This suggests revenue is unlikely to reach $14 billion within the coming three years. The bull case, which predicted revenue of $32 billion, is even more improbable, so where does that leave investors now?
It's important to remember that the macroeconomic climate of the past couple of years was something that was completely out of Roku's control. Widespread supply chain bottlenecks and rampant inflation weighed heavily on the company's performance, but those headwinds are finally beginning to abate.
The good news, however, is that Roku's performance will likely easily surpass the bear case. But, barring unforeseen circumstances, the stock won't achieve Wood's base case -- at least not by 2026.
Will Roku stock soar 625%?
Given the hurdles of last year, it's simply not logical that Roku stock will meet Ark's bull case. In fact, it seems highly unlikely the stock can even achieve the base case -- at least not right now. Investors will need to reset their thinking -- particularly given the macroeconomic headwinds, which are only now starting to abate. That's not to say that Roku won't hit Ark's base price target of $605. I believe it will, at some point over the coming decade.
I'm a Roku bull and shareholder, so I'm rooting for the company to succeed. I'd argue there's still a compelling case for buying Roku stock right now, particularly given its bargain basement price of roughly 3 times next year's sales, still near its lowest valuation ever.
With viewers abandoning cable at a record pace, the company's large and growing audience, and its steeply discounted valuation, now is the time to buy Roku -- while it's still a bargain and before it starts to run.
