Will Roku Soar 9x From Here?

Roku’s most recent financial report disappointed investors. Slowing streaming growth and lower ad spending, paired with economic uncertainty, have caused Roku’s stock to plummet.

Shares are down over 66% year to date and more than 80% compared to the highs reached last year. The stock is so battered that many are staying away.

However, investors like Cathie Wood, CEO of ARK Invest, see the potential and are buying more shares as Roku’s stock hits new lows. Is now the time to buy Roku (ROKU)?

What Does Roku Offer?

Roku manufactures digital media players for video streaming. Roku’s claim is that it provides the simplest way to stream entertainment to your TV.

In 2008, Roku became the first streaming device; today, it’s the leading platform in the United States, Canada, and Mexico.

Roku has the advantage of being a first-mover in the market, and now holds a dominant position versus its peers.

A key driver of the company’s success has been Roku OS, the only operating system that’s purpose-built for televisions. This system ensures Roku users experience fewer video-start failures vs competitors. In the first quarter, Roku also tied for the lowest buffering time.

The company licenses its operating system to television manufacturers. Its ad-supported streaming service, The Roku Channel, drives growth and engagement. This channel features thousands of free movies and shows, live entertainment, news, and sports channels. 

Could Roku’s Stock Soar?

The bear market, rising interest rates, and 40-year-high inflation haven’t helped Roku this year — but will these variables be short-lived? Will Roku’s stock make a significant comeback?

According to Cathie Wood, Roku stock could hit $605 a share by 2026. Although some believe this is a steep prediction, Wood has made bold predictions in the past, and she wasn’t far off. For example, in 2018, she predicted Tesla’s market cap to rise to over $700 billion when the company was worth just just north of $50 billion. Tesla famously eclipsed $1 trillion market cap in 2021.

Wood’s current Roku prediction implies a nearly 10x upside. So, what do the numbers say? How does Roku plan to grow?

Roku recently missed analysts’ consensus estimates. However, once you dig deeper, there is a hidden gem in the company’s latest report, showcasing Roku’s ability to boost revenue growth and profitability.

Sure the report was disappointing at first glance. Roku’s revenue was $764.4 million, increasing 18% year over year, while estimates called for revenue of $804 million. A loss per share of $0.82 was disappointing, but it’s not all doom and gloom.

Roku’s viewer base is growing: active accounts of 63.1 million climbed 14% year over year, driving 20.7 billion streaming hours, a jump of 19%. Plus, there’s that gem — Roku’s average revenue per user climbed by 21% to $44.10 — its highest rate ever. Roku is also gaining market share in the ad space. There’s plenty to be optimistic about.

What Does the Future Hold for Roku?

Roku continues to gain a strong market presence and is capitalizing on revenue earned through digital payments and advertising.

The company is well-positioned to cash in on a $26 billion connected TV advertising market, which is expected to grow by 24% this year — and hit nearly $50 billion by 2027.

In the first half of 2022, Roku’s platform revenue, which includes advertising, grew 32% year over year to $1.3 billion. The next decade holds a lot of promise for Roku investors if that pace of growth can be sustained.

When the economy strengthens and advertisers invest more heavily in connected TV platforms, Roku could see massive acceleration in adoption rates.

Is Now the Time to Buy ROKU Shares?

As of this writing, shares of ROKU are trading down significantly from the stock’s 52-week high of $405.34. Roku’s comparably low valuation presents a buying opportunity for those who plan to buy and hold for years, if not decades.

For those planning to buy in now, the near term may be less than ideal, even painful, but the long-term transition toward streaming should benefit patient investors. Roku shares are cheap now, and we see fair market value sitting just under $91 per share based on an analysis of cash flows.

If Wood is right, though, Roku is a volcano waiting to erupt with much greater upside. She’s surprised the market with outlandish forecasts before and been right, will she hit the bullseye again? Add Roku to your watchlist to find out.