There's no denying the challenges investors faced in 2022, but this year is coming to a close in stark contrast to its predecessor. After shedding 35% of its value last year, the Nasdaq Composite has come roaring back, soaring 42% through late December.
There's more good news. Going back to 1972 -- the first full year the Nasdaq traded -- in every year after a market recovery, the tech-heavy index has continued its upward trend, rising 19%, on average, which suggests that 2024 will be another good year for investors.
One of the hottest exchange-traded funds (ETFs) this year has been Cathie Wood's Ark Innovation fund, generating returns of 68%. One of Ark's most eye-catching calls is that Roku stock will reach $605 by 2026, representing upside of 547% compared to its recent closing price. The bull case is even more mind-boggling, suggesting the stock could soar to $1,493, representing gains of 1,496%.
There's no doubt the stock has a great deal of upside potential but what is the likelihood that Roku will surpass Ark's lofty benchmark? Let's take a look at the available evidence.
Image source: Getty Images.
The case for Roku
The investment thesis for Roku is simple. It is the most widely used streaming platform in the world, controlling 51% of the market, according to a report released by data analytics provider Pixalate. This marks the company's strongest showing and deepest market penetration since early 2020.
Roku's user-friendly system offers a wide variety of streaming options, including dongles, set-top boxes, the Roku operating system -- which is being adopted by many TV manufacturers -- and Roku-branded connected TVs, which gives the company a strong foundation for further growth.
The secular decline in cable television also benefits Roku. The industry lost a record 5.9 million subscribers in 2022, according to Leichtman Research Group, and has already shed 4.9 million through the first nine months of 2023. As the leading streaming video platform, Roku offers a compelling alternative for cable defectors, many of whom will turn to streaming for their in-home entertainment.
Roku's audience is highly engaged, with bodes well for the company's digital advertising. In the third quarter, Roku's active accounts grew 16% year over year to 75.8 million. At the same time, streaming hours rose 22% to 26.7 billion. That works out to an average of 3.9 hours per account per day, up from 3.7 hours in the year-ago quarter. Multiple viewers across 76 million active accounts represents a compelling opportunity for marketers, fueling the expansion of advertising on Roku's platform.
There's one other secular tailwind that should help drive Roku's growth: the ongoing deterioration of broadcast television. Advertisers are well aware of this trend and marketing dollars are following the audience. Ad spending on traditional broadcast TV fell 23% year over year in the third quarter, according to Standard Media Index (via MarketingDive). At the same time, spending on connected TVs and streaming video services increased 39%.
In summary, Roku's industry-leading streaming platform, the secular decline of broadcast television and cable, and the ongoing shift in ad dollars should all fuel Roku's future success.
The assumptions in Ark's thesis
Ark released its Roku valuation model in July 2022, suggesting three potential stock price outcomes by 2026:
- Bear case: $100, implying upside of 7%.
- Base case: $605, implying upside of 547%.
- Bull case: $1,493, implying upside of 1,496%.
A number of variables feed into the predicted outcomes, with the biggest contributor being the success (or failure) of the digital advertising shown on Roku's platform and the revenue the company generates by 2026:
- Bear case: Revenue of $3.6 billion.
- Base case: Revenue of $14.4 billion.
- Bull case: Revenue of $32.1 billion.
The fly in the ointment, of course, is the downturn, which ground Roku's growth to a halt. Revenue grew just 13% to $3.1 billion in 2022 and revenue is up just 10% during the first nine months of 2023, so Roku is already playing catchup. The improving economy is already driving a rebound in digital advertising -- which makes up the lion's share of Roku's revenue.
Analysts' consensus estimates are calling for revenue of $3.4 billion this year, $3.8 billion next year, and $4.4 billion by 2025. Balancing Ark's revenue expectations against those of other analysts, Roku will probably exceed the bear case, but it seems highly unlikely it will come anywhere near the base case. So what are investors to do?
Keep in mind that Ark's estimates are just that, and the macroeconomic headwinds of the past couple of years plagued the broader market -- not just Roku. Looking ahead, it's entirely possible that Roku will be able to achieve Ark's base case, it might just take a few more years.
Will Roku stock soar 547%?
Given the events of the past couple of years, it strains logic to suggest that Roku stock would climb 1,496% over the coming three years. In fact, I think it's a stretch to suggest the stock will reach Ark's base case and rise 547% by 2026 -- though its certainly possible and stranger things have happened.
That said, consider these salient points:
- Roku is the worldwide streaming leader, and penetration is increasing.
- Cord-cutting, the secular decline of broadcast TV, and the ongoing adoption of streaming are trends that all favor Roku.
- Digital advertising, which was hit hard by the downturn, is finally beginning to rebound.
These factors all point to a bright future for Roku. Furthermore, there's another compelling reason to buy Roku right now: its valuation. The stock is currently selling for roughly 3 times next year's sales, well below the three-year average of 11 and still near its lowest valuation ever.
Given the available evidence, I would suggest Roku stock is a buy, even if it doesn't reach Ark's lofty expectations any time soon.
