Cathie Wood Thinks This Streaming Stock Will Jump 747%. Is She Right?


Ark Invest CEO Cathie Wood is known for making bold stock calls.

In 2018, she predicted Tesla would hit $4,000 a share, which seemed far-fetched at the time, but that prediction came true as Tesla reached that price on a split-adjusted basis in 2021.

Tesla is the biggest holding in Ark Invest’s flagship Ark Innovation ETF (NYSEMKT: ARKK), but Wood also has high expectations for the next-biggest holding in the fund, Roku (NASDAQ: ROKU).

Ark’s price target calls for Roku stock to reach $605 a share by 2026, implying a gain of 747% from its current price. Considering Roku had reached nearly $500 a share during the pandemic, that price target is not as preposterous as it might initially seem.

Ark issued this price target over a year ago, back in July 2022. While that might make the forecast seem less relevant, it gives investors time to assess Roku’s performance since then and compare it to Ark’s projection. Let’s review Ark’s argument for Roku reaching $605 before assessing its likelihood.

Image source: Getty Images.

The base case

Ark’s base case, or middle-of-the-road forecast, is for the stock to reach $605, but it also gives a 25% chance that the stock could be worth $100 or less, its bear case, and a 25% chance that the stock could soar to $1,493 or more, its bull case.

Its base case calls for its revenue to reach $14.4 billion in 2026, with the vast majority coming from video advertising. Over the last four quarters, Roku has generated $3.2 billion in revenue, so that forecast implies a 54% compound annual growth rate over the next three and a half years.

Packed into that revenue forecast is that the company will have 157 million active accounts, up from 73.5 in the second quarter, implying 24% compound annual growth, compared to 16% in the second quarter.

Ark also expects daily hours streamed per active account to increase from 3.8 to 4.5, which seems reasonable, and it sees 35% of those hours coming from advertising-on-demand platforms, which seems reasonable as nearly every streaming service, including Netflix, Walt Disney, and now Amazon has launched an ad tier and is pushing subscribers to adopt it by raising prices on the ad-free versions.

Finally, Ark expects gross margin to improve to 59%, up from 45% in the second quarter, and it forecast an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 29%, a dramatic improvement from the -2% margin Roku reported in its most recent quarter.

Can Roku get there?

Given Roku’s recent struggles, Ark’s targets seem ambitious for just three and a half years from now.

Above all, the assumptions seem to have ignored the potential for cyclical headwinds to impact its performance, and that’s exactly what’s happened over the past year. Revenue growth in the digital advertising industry nearly ground to a halt, and Roku posted two consecutive quarters of flat revenue growth, emerging from that in the second quarter with 11% growth, and that’s expected to improve to 17% growth in the third quarter.

Roku is also facing challenges on the cost side, as it’s issued several rounds of layoffs in an attempt to reach its goal of generating an adjusted EBITDA profit in 2024.

The streaming distribution platform will need a small miracle to hit Ark’s base case numbers by 2026, but on a longer time frame, those seem like reachable goals.

The company is still growing membership and streaming hours steadily, up 16% and 21% respectively in the most recent quarter, and the shift from linear TV to streaming seems to be picking up steam. This should only increase once sports make the leap.

Meanwhile, the proliferation of ad tiers from major streaming services should help drive Roku’s ad business.

Considering the stock was hovering near $500 during the pandemic, a surge to $605 isn’t out of the question. It will take longer than three and a half years for it to do so, but for those kinds of returns, it’s worth waiting 10, 15, or even 20 years.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon.com, Ark ETF Trust-Ark Innovation ETF, Netflix, Roku, and Walt Disney. The Motley Fool has positions in and recommends Amazon.com, Netflix, Roku, Tesla, and Walt Disney. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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