One analyst with an astonishing track record claims Roku could rise by as much as 12x from current levels, so we decided to investigate whether there is any merit to bullish forecast.
Who is the analyst and is she worth listening to? That’s up for debate. At her heights, Cathie Wood was revered as the prognosticator extraordinaire, who bet Tesla would rise from mediocrity to become one of the most valuable companies in the world. She was right, and her reputation was sealed, at least in 2020-21.
Then the bear market came, the Federal Reserve raised rates, inflation skyrocketed, and growth stocks – the key holdings in her flagship ARK Invest innovation fund – crashed.
Five years ago ARKK share price was $39.94. As of the time of this research it sat almost 10% lower. But that fact alone doesn’t tell the full story. At its heights, ARKK eclipsed $156 per share. The subsequent collapse has been monumental and has called into question whether Cathie Wood indeed got lucky with Tesla, and whether her Roku prediction deserves merit. We investigate.
Roku Is A Big Bet For ARKK
At the time of writing, Roku hovered around $50 per share. The ARK Invest team has set a price target of $605 on the company by 2026, which would result in a 12x gain. Wood is so confident that the upside is massive she and her team have bet 7% of their portfolio on this single holding.
Let’s take a look at the numbers to see if this lofty price target is possible. The first noteworthy and impressive achievement is that revenues have risen annually by over 50% the past three years:
- 2019: $1.12B (up 52% yoy)
- 2020: $1.77B (up 57.5% yoy)
- 2021: $2.76B (up 55.5% yoy)
Historic numbers are one thing but what about future forecasts?
Here’s what we see for fiscal years to come:
- 2022: $3.06B
- 2023: $3.25B
- 2024: $3.90B
- 2025: $4.47B
- 2026: $5.10B
By 2026, revenues are forecast to be less than 2x higher than where they sat for FY 2021. Does that suggest a potential 12x gain is on the horizon?
The top line doesn’t reveal the full story.
Under The Hood
When we look under the hood, the key metric is profitability. Wall Street will pay a premium for a company that transitions from losing money to breakeven to gushing with profits. So is a waterfall of profits coming?
We’re not seeing it and neither are most analysts, who have a consensus bet as follows:
- 2022 EPS -$3.62
- 2023 EPS -$4.47
- 2024 EPS -$3.31
- 2025 EPS -$1.32
- 2026 EPS +$1.05
As you can see, EPS is not forecast to turn positive until 2026. Now let’s imagine the price was $605 by then as forecast by Wood, what would the Price-Earnings ratio be? Close to an eye-popping 600x.
That seems too rich to be realistic. Today the company trades at a 43x PE multiple.
Fundamental Factors Hurting Roku
Last year, the supply of Roku operating system connected TVs reduced while the prices of those available spiked. The result: a slowdown in demand. It’s true that a more seamless supply chain should fix that issue but that won’t happen soon.
Roku makes a good chunk of its money from ads, which have been cut drastically during the recession. When the bull market returns, Roku will be poised to profit but for now real economic weakness is hurting Roku’s top line.
So if you think Roku can 12x you need to bet the trend of cutting cable and turning to streaming services will continue, and accelerate. Last year streaming services eclipsed cable, suggesting a tectonic shift that will not reverse. Still, we can’t see this trend is sufficient to spark revenue generation and profitability that would justify a 12x gain.
Analysts on average are betting on fair value about 16% higher with an intrinsic value that would infer a price per share of $59.22 while our numbers suggest a more pessimistic fair value of $48 per share.