Cathie Wood is the chief investment officer at Ark Invest, an asset management company focused on disruptive innovation. The company manages several thematic exchange-traded funds (ETFs) focused on technologies such as streaming media, digital advertising, and mobile applications.
Roku (ROKU +2.32%) is the fourth largest holding across all of Ark's various funds, and it accounts for 5.6% of the company's invested assets. A valuation model published by Wood and her team posits a bull-case price target of $1,493 per share by 2026, implying a 1,540% upside from its current price.
Here's what investors should know.
NASDAQ: ROKU
Key Data Points
Roku is a leading TV streaming platform
Roku operates the leading TV streaming platform by viewing time in the U.S., Canada, and Mexico. It accounted for 53% of all connected TV (CTV) devices in North America in the third quarter, while the next three brands -- Samsung, Amazon, and Apple -- captured just 34% market share combined. The Roku OS was also the best-selling TV operating system in the U.S. and Mexico in 2023, which points to enduring brand authority.
In short, Roku engages viewers more effectively than other streaming platforms, and that makes the company a critical partner for content publishers and advertisers alike. And Roku monetizes both sides of the streaming ecosystem. Specifically, it monetizes subscription content with transaction fees, and it monetizes ad-supported content by taking a portion of advertising inventory from publishers and providing ad tech services to media buyers.
Roku also has its own ad-supported streaming service, The Roku Channel, which offers a combination of licensed content, original content, and live TV. The company monetizes that free service by selling ad inventory, and it has become quite popular. The Roku Channel accounted for 1% of all TV viewing time in September. That's slightly less than Max by Warner Bros. Discovery at 1.2%, and slightly more than Paramount+ by Paramount Global at 0.9%.
Ultimately, Roku is well positioned to benefit as streaming media becomes more prevalent, and the ad-supported side of the ecosystem is expected to grow particularly quickly. Grand View Research believes ad tech spending will increase by 14% annually through 2030. Similarly, Insider Intelligence expects U.S. CTV ad spending to compound at 15% annually through 2027.
Even then, CTV ad spending will account for just 44% of total TV ad spending, meaning the market will be far from mature.
Ark Invest's valuation model
In June 2022, Ark Invest published a valuation model for Roku that explores three price trajectories through 2026. The bear scenario values the stock at $100 per share, implying a 10% upside from its current price. The base scenario values the stock at $605 per share, implying 565% upside. The bull scenario values the stock at $1,493 per share, implying a 1,540% upside.
Ark has a simple investment thesis: Roku is the leading streaming platform in the U.S., Canada, and Mexico, and its platform is "poised to become the dominant purpose-built TV operating system connecting consumers, content providers, and advertisers." From that starting point, Ark makes assumptions about engagement and monetization to arrive at three price targets. The revenue growth implied by each price target is discussed below.
- Bear scenario: Ark assumes total revenue will reach $3.6 billion in 2026, implying annual growth of 2% in the interim.
- Base scenario: Ark assumes total revenue will reach $14.4 billion in 2026, implying annual growth of 56% in the interim.
- Bull scenario: Ark assumes total revenue will reach $32.1 billion in 2026, implying annual growth of 100% in the interim.
I believe the truth lies somewhere between the bear and base cases. Roku does indeed have a strong market presence in streaming media, and that should support above-average growth as more ad dollars move from legacy TV to CTV.
Ultimately, that gives Roku a good shot at annual sales growth ranging from 15% to 20% through the end of the decade. That means the bear scenario seems too conservative, but the base scenario and the bull scenario seem far too aggressive.
Roku stock is worth buying, but investors should temper their expectations
The average analyst is less bullish than Cathie Wood where Roku is concerned. The Wall Street consensus calls for the company to grow sales at 16% annually over the next five years. That estimate is reasonable given the projected growth in ad tech spending and CTV advertising, though it would represent a deceleration from the 30% annual sales growth Roku achieved over the last three years.
Regardless, the Wall Street consensus makes the current valuation of 3.8 times sales seem cheap, and that multiple is certainly a discount to the three-year average of 9.1 times sales. Patient investors should consider buying a small position in this growth stock today, provided they understand that a 1,540% return by 2026 is very unlikely. A more realistic projection would be a 50% to 100% return during that time.
