Last year was a great one for Roku (ROKU -10.29%) shareholders, as the stock soared 125% in 2023. But that gain doesn't take away from the fact that the stock is still 82% below its all-time high (as of Jan. 15).
The beaten-down price has prompted Cathie Wood to add to her position in the streaming stock in the new year. It's currently the third largest holding in her firm's flagship Ark Innovation ETF. She must see some strong returns on the horizon.
Can this top Cathie Wood stock reach $125 per share in 2024? Here's what investors should be thinking about.
Roku is a media disruptor
Cathie Wood and her firm focus on innovative and disruptive companies that have huge growth potential. With this framework in mind, it's easy to see how Roku fits the description.
For starters, the business benefits from the powerful secular tailwind of streaming entertainment. People have greater convenience, greater choice, and lower prices compared to traditional cable TV. In the U.S., there are more households that don't have a cable subscription than those that do. As the leading smart TV operating system in the U.S., Roku benefits from this trend.
The platform connects viewers with their favorite content subscriptions, all in a single easy-to-use interface. And after recognizing that advertising dollars will shift from linear TV to a streaming environment, Roku has developed a platform that allows companies to target customers in a world in which connected TV will become more popular.
At the end of the third quarter of 2023, the business counted 75.8 million active accounts, which was up 16% year over year. The fact that there are 1.4 billion broadband households worldwide presents Roku with a huge addressable market opportunity. I'm sure this is what Ark Invest is excited about.
Waiting for more favorable industry conditions
It's true that Roku has seen its growth slow down thanks to macroeconomic headwinds, mainly rising interest rates. But in recent quarters, things have begun to accelerate. Revenue jumped 20% in Q3, the fastest rate of growth since first-quarter 2022. It looks like the advertising market is showing signs of improvement.
As we set our sights on the rest of 2024, Roku will benefit if the economic backdrop becomes more favorable. Should this become a reality, people will have more discretionary spending that can be directed toward streaming entertainment. This could provide a boost to active account metrics.
Furthermore, after seeing that consumer spending picks up, advertisers can start investing more in marketing efforts. This could propel Roku's sales potential, with the added benefit of driving up average revenue per user.
The heavyweights in the digital advertising industry, including Alphabet, Meta Platforms, and Amazon, are all posting strong growth in this area. Perhaps this indicates better days ahead for Roku.
Investment perspective
As of this writing, Roku shares trade at roughly $84. To hit $125 by year-end means that the stock will have to rise 48% in less than 12 months. While fundamentals might be trending in the right direction, as I just noted, during what is a shorter time horizon, investor sentiment is what matters most. And this is extremely hard to predict with any sort of accuracy.
It's perfectly in the realm of possibilities for Roku's stock, which sells at a price-to-sales ratio of 3.6, to see its valuation multiple either expand or compress by the end of the year. It also depends on what's currently priced in.
The good news, though, is that investors don't need to figure this out. Instead, investors should consider whether this stock is a smart long-term holding in their portfolios. While I think there is a less than 50% chance that Roku will reach $125 by the end of 2024, it still makes for a solid investment.
