Ark Invest's Cathie Wood has established herself as one of the foremost growth-stock investors. Wood famously predicted Tesla would hit $3,000 per share (split-adjusted) back in 2018, which it did, and shares of her flagship Ark Innovation ETF (ARKK 1.05%) doubled in 2020 as growth stocks and tech stocks rallied during the early stages of the pandemic.
While her funds have fallen over the last two years in the broader stock market sell-off, Wood's moves are still closely watched by many investors. Right now, one of her favorite stocks is Roku (ROKU -10.29%), the leading streaming-distribution platform. Roku is the second-largest holding in the Ark Innovation ETF (behind Coinbase), making up 8.6% of the fund, and it's also the second-largest holding in the Ark Next Generation Internet ETF (ARKW 0.45%).
According to its forecast from last year, Ark's base case estimate calls for Roku to hit $605 per share in 2026, roughly a 470% gain from its current price. That forecast assumes Roku's active accounts reach 157 million by that year, roughly double the 75.8 million accounts Roku currently has. It also expects daily hours streamed per active account to increase from 3.6 currently to 4.5, while monetization per hour improves from $0.13 to $0.21.
This year, Ark's forecast has looked prescient as Roku shares are up more than 160% year to date, and the business is gaining traction again following a slowdown in digital-advertising growth and poorly timed investments last year that led to wide losses.
Now, another Wall Street analyst has just upgraded the streaming stock to a buy.
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Roku stock gets an upgrade
Cannonball Research's Vasily Karasyov raised his rating on the streaming stock from neutral to buy on Monday with a $116 price target, implying a 22% gain from where the stock closed on Friday. Roku shares have gained 12.5% so far this week, which seems to be largely due to the upgrade.
In a note, Karasyov said there's "room for upside" to analyst estimates for 2024, and he expects to see estimates revised upwards in the coming months. The analyst said he didn't expect an improvement in ad-market trends but instead believed estimates could move even if the advertising market remained consistent.
If he's right, the current consensus is underestimating Roku's ability to gain leverage on the bottom line.
Is Roku a buy?
Roku stock has surged because the business has turned around faster than expected. After multiple rounds of layoffs and a modest recovery in the digital-advertising market, the stock has returned to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profitability well ahead of schedule with an EBITDA profit of $43.4 million in the third quarter. Management had earlier said it was targeting an adjusted EBITDA profit for full-year 2024, and it maintains that guidance.
Revenue in Q3 rose 20% to $912 million, and the company should benefit from the recovery in the digital-ad market as larger platforms like Alphabet and Meta Platforms have posted accelerating revenue growth as well. Meanwhile, there appears to be ample room for growth in connected TV as major streaming platforms like Netflix, Disney, and Amazon have all recently launched ad-supported tiers, opening up more inventory and monetization opportunities for Roku.
Finally, with the writers and actors' strikes both over, the company should benefit from a rebound in media-and-entertainment spending, one of its biggest verticals, as Hollywood ramps up production again. Roku is an obvious platform to promote the industry's TV shows and movies. The company noted in the Q3 report that media-and-entertainment promotional spending was a headwind, but that should soon shift.
Even after the stock's surge this year, shares are still down about 75% from their pandemic-era peak, and the company looks relatively small at a market cap of $15 billion, considering the opportunity in streaming. While Ark's $605 price target might be a reach, there's still a lot of growth left in the streaming industry, and Roku will benefit from the rise of ad-based streaming, which is only just starting.
Even after jumping 160% this year, the streaming stock still looks like a smart buy.
