In many respects, Roku (ROKU 0.19%) stock is a victim of varying expectations. Pandemic-driven optimism about its business model took shares to a high of more than $490 per share in 2021 before higher spending and falling expectations wiped out more than 90% of its value at one point.
While Roku investors are somewhat more optimistic than they were at the low point, the stock still trades at more than 80% below its all-time high.
However, Roku bulls such as Cathie Wood have predicted a significantly higher price for Roku stock, and with viewers continuing to turn to streaming from traditional TV, it is likely worth pondering whether Roku can rise more than tenfold by 2030.
Image source: Getty Images.
Roku's growth drivers
Roku's streaming platform is drawing customers, streaming channels, and advertisers, aggregating these parties into one ecosystem. Also, it sells streaming players and TVs at a loss, drawing more viewers into its ecosystem.
Its approach made it the top-selling TV platform in the U.S., Canada, and Mexico. Additionally, Roku has made significant strides in other Latin American markets and Europe, making it a formidable competitor to larger and better-funded peers such as Alphabet, Apple, and Samsung.
Furthermore, despite competing with Amazon, Roku forged a partnership that gives Amazon and Roku access to each other's advertising audiences, producing the world's largest authenticated connected TV footprint. Consequently, advertisers reach 40% more viewers on the same budget while reducing repeat views of an ad, giving them more value from their ad spend.
Investors should also note Roku's 2026 price target from Cathie Wood's Ark Invest: $605 per share. This forecast was driven primarily by expectations of video ad growth.
Admittedly, Roku stock is unlikely to rise that much in less than a year and a half. Still, the fact that Roku is Ark Invest's fifth-largest position is a likely confirmation of its continued belief in the stock.
Obstacles to tenfold growth
Despite this optimism, Roku has disappointed investors since the stock plunged in the 2022 bear market. During that time, profits gave way to losses amid slumping ad spend, and the company does not expect a return to positive operating income until 2026.
So while other tech growth stocks, such as Nvidia and Palantir, recovered and established far higher highs, Roku stock has not made any net gains over the last four years.
Moreover, even with revenue growth remaining in the double digits, the increases have slowed since the pandemic. Roku also stopped publishing numbers for monthly active users and average revenue per user, another indicator that growth has not met expectations.
Furthermore, investors should take note of valuation declines. Thanks to its ongoing losses, Roku does not have a P/E ratio. Still, the price-to-sales (P/S) ratio, which once topped 30 during the pandemic, now stands at just above 3, even with the optimism surrounding the Amazon deal. That valuation differential shows how far Roku has fallen, but it may also point to the stock's potential if it continues to recover.
Could Roku 10x by 2030?
Ultimately, five years is a long time, and nobody knows for sure whether Roku stock will increase tenfold over that time. Nonetheless, a turn to profitability and multiple expansion could help the stock accomplish that goal.
While a simple return to a 30 P/S ratio would do it, that is unlikely in the short term. The stock also faces long odds of reaching Ark Invest's price target of $605 per share by the end of next year.
However, investors should remember that Roku has remained competitive. Moreover, it has formed an alliance with one of its rivals, thus increasing its value as an advertiser.
Additionally, Roku is on track to turn profitable during this five-year target. If revenue merely doubles in five years as Roku's stock price rises tenfold, its P/S ratio would be approximately 15, comparable to that of many tech growth stocks. Thus, while a tenfold gain in five years is unlikely, it can't be ruled out.
