According to Cathie Wood’s Ark Invest, there are 1 great growth stocks that should be hand-bought before they soar 547%

By | December 23, 2023

A person cheering while looking at graphs on a computer monitor

There’s no denying the challenges investors faced in 2022, but this year is coming to an end in stark contrast to its predecessor. After losing 35% of its value last year, the Nasdaq Composite has come roaring back again, up 42% through the end of December.

There is more good news. Going back to 1972 – the Nasdaq’s first full year of trading – the tech-heavy index has continued its upward trend every year after a market recovery, with an average gain of 19%, suggesting that 2024 will be another good year . for investors.

One of the most popular exchange traded funds (ETFs) this year was Cathie Wood’s Ark Innovation fund, with a return of 68%. One of Ark’s most eye-catching statements is that Roku stock will reach $605 by 2026, which represents a 547% increase from its recent closing price. The bull case is even more mind-boggling, suggesting the stock could rise to $1,493, for a gain of 1,496%.

There’s no doubt the stock has a lot of upside potential, but what are the chances that Roku will surpass Ark’s lofty benchmark? Let’s look at the available evidence.

A person cheering while looking at graphs on a computer monitor.A person cheering while looking at graphs on a computer monitor.

Image source: Getty Images.

The case for Roku

The investment thesis for Roku is simple. It is the most used streaming platform in the world, which holds 51% of the market, according to a report from data analytics provider Pixalate. This marks the company’s strongest results and deepest market penetration since early 2020.

Roku’s easy-to-use system offers a wide range of streaming options, including dongles, set-top boxes, the Roku operating system – which is being adopted by many TV manufacturers – and Roku-branded connected TVs, giving the company a strong base for further growth .

Cable TV’s long decline also benefits Roku. According to Leichtman Research Group, the industry lost a record 5.9 million subscribers in 2022, and has already lost 4.9 million in the first nine months of 2023. As a leading streaming video platform, Roku offers an attractive alternative to cable defectors, many of whom will turn to streaming for their -n-home entertainment.

Roku’s audience is highly engaged, which bodes well for the company’s digital advertising. In the third quarter, Roku’s active accounts grew 16% year over year to 75.8 million. At the same time, streaming hours increased by 22% to 26.7 billion. That equates to an average of 3.9 hours per account per day, compared to 3.7 hours in the previous year’s quarter. Multiple viewers across 76 million active accounts present a compelling opportunity for marketers, driving the expansion of advertising on Roku’s platform.

There’s another secular tailwind that should fuel Roku’s growth: the continued deterioration of television broadcasting. Advertisers are well aware of this trend and marketing dollars follow the audience. According to the Standard Media Index (via MarketingDive), ad spend for traditional broadcast television fell 23% year over year in the third quarter. At the same time, spending on connected TVs and streaming video services increased by 39%.

In summary, Roku’s leading streaming platform, the continued decline of television and cable broadcasting, and the continued shift in advertising dollars should all fuel Roku’s future success.

The assumptions in Ark’s dissertation

Ark published its Roku valuation model in July 2022, suggesting three possible stock price outcomes by 2026:

  • Bear case: $100, implying a 7% upside.

  • Base case: $605, implying a 547% upside.

  • Bull case: $1,493, implying an upside of 1,496%.

A number of variables contribute to the predicted results, with the largest contributor being the success (or failure) of the digital ads served on Roku’s platform and the revenue the company generates in 2026:

  • Bear case: revenue of $3.6 billion.

  • Base case: revenue of $14.4 billion.

  • Bull case: $32.1 billion in revenue.

The fly in the ointment, of course, is the downturn, which stalled Roku’s growth. Revenue grew just 13% to $3.1 billion in 2022 and sales are up just 10% through the first nine months of 2023, so Roku is already catching up. The improving economy is already fueling a revival in digital advertising, which makes up the lion’s share of Roku’s revenue.

Analyst consensus estimates call for revenue of $3.4 billion this year, $3.8 billion next year and $4.4 billion in 2025. Comparing Ark’s revenue expectations against those of other analysts, Roku is likely to surpass the bear case, but it seems very unlikely that this will happen. get somewhere close to the base case. So what should investors do?

Keep in mind that Ark’s estimates are just that, and the macroeconomic headwinds of the past few years have battered the broader market — and not just Roku. Looking ahead, it’s entirely possible that Roku can reach Ark’s base case, but it could still take a few years.

Will Roku Shares Soar 547%?

Given the events of the past few years, it’s logical to suggest that Roku stock will rise 1,496% over the next three years. In fact, I think it’s an exaggeration to suggest that the stock will reach Ark’s base case and rise 547% by 2026 – although it’s certainly possible and stranger things have happened.

That said, consider these salient points:

  • Roku is the global streaming leader and penetration is increasing.

  • Cord cutting, the continued decline of broadcast television, and the continued adoption of streaming are trends that are all in Roku’s favor.

  • Digital advertising, which was hit hard by the recession, is finally starting to recover.

These factors all point to a bright future for Roku. Plus, there’s another compelling reason to buy Roku now: its valuation. The stock is currently selling for roughly three times next year’s sales, well below its three-year average of eleven and still near its lowest valuation ever.

Given the available evidence, I’d suggest Roku stock is a buy, even if it doesn’t meet Ark’s lofty expectations anytime soon.

Should You Invest $1,000 in Roku Now?

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Danny Vena has positions in Roku. The Motley Fool holds and recommends positions in Coinbase Global, Roku, and UiPath. The Motley Fool has a disclosure policy.

History Says the Nasdaq Will Soar in 2024: 1 Great Growth Stocks to Buy Before It Surges 547%, According to Cathie Wood’s Ark Invest was originally published by The Motley Fool

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