Investors may remember when Cathie Wood's Ark Invest forecast an ambitious 2026 price target for Roku (ROKU -10.29%) of $605 per share. Although Roku briefly rose above $490 per share at the height of the 2021 bull market, it now sells at a small fraction of that price and has often struggled to hold on to its gains.
Roku stock fell again after reporting its fourth-quarter and full-year earnings for 2023. With the shares trading in the $70-per-share range and the end of 2026 less than three years away, should investors consider the goal realistic?
Ark Invest's 2026 price target
First, investors should remember that $605 per share is the base case. The report also included a bear case, giving the stock a 25% chance of reaching the bear price target of $100 per share.
As previously mentioned, the stock was briefly above $100 per share late last year. Moreover, the bear case called for a low-end revenue estimate of $3.6 billion. Since Roku reported revenue of $3.5 billion in 2023, revenue levels should far exceed forecast lows and may come closer to Ark Invest's base case of $14 billion.
However, the prospects for stock price growth are less clear. Roku stock rose from less than $60 per share to above $490 per share over 16 months during the pandemic. Still, those gains fully reversed themselves after the lockdowns ended. Consequently, at today's price it will have to rise by approximately 730% in less than three years to achieve that goal.
Indeed, Ark Invest has backed its optimism by investing in Roku. At 5% of Ark's holdings, it is currently the firm's fourth-largest position. Nonetheless, Roku described the recovery in the ad market as "uneven" on its Q4 2023 earnings call. Roku's average revenue per user (ARPU) also fell by 4%, which the company blamed on efforts to break into international markets.
Another challenge is its ongoing losses. Since turning a profit in 2021 during the pandemic's height, net losses have continued to grow. The company lost $710 million in 2023, versus its $498 million loss in 2022. The rising cost of goods sold and increasing operating expenses widened its losses.
Why investors might feel optimistic about Roku
Despite such challenges, Roku's free cash flow has turned positive. Free cash flow for the trailing 12 months was $176 million in 2023, up from a negative free cash flow of $154 million in the same, year-ago period.
According to Pixalate, Roku holds a 51% market share in the connected TV device market, maintaining a market lead over the likes of Alphabet and Amazon. More viewership and ad dollars continue to transition from traditional TV to streaming, a trend that primarily benefits Roku thanks to its market lead.
Furthermore, active accounts rose 14% to 80 million, while streaming hours surged 20% higher. Such growth bodes well for Roku as ad spending recovers. Admittedly, the drop in ARPU is disappointing. Still, if it can maintain its growth rate in customer growth and streaming hours, revenue in 2026 will likely be closer to the base case predicted by Ark Invest.
Will Roku trade at $605 per share in 2026?
Considering the stock's struggles, the $605 per share price target in 2026 is possible but looks increasingly unlikely. Indeed, Roku stock rose rapidly during the pandemic, but it will probably take a much-improved ad market for the stock to repeat that feat and make Ark Invest's base case price target.
However, industry trends continue to work in Roku's favor, and active accounts and streaming hours continue to grow rapidly. If ad revenue fully recovers, investors could still earn considerable returns.
