The video streaming hype drove Roku (NASDAQ:ROKU) to record highs, and now the stock has plummeted due to the current streaming wars. However, according to Cathie Wood, the CEO of ARK Investment Management (ARKK), the stock could rally by 2026 because of the constant shift to video streaming.
While experts find the case more bullish for the stock at $100, many challenges remain for the business model to even think about a price target of $605, let alone the bull case of $1493.
Shift To Advertising
Much of the original view on Roku (NASDAQ:ROKU) had as much to do with the streaming video shift where consumers went from spending $100+ on a cable package to a couple of streaming services at far lower prices. The main benefit of video streaming services was better quality services with easy access to consumer interests.
As a result, consumers quickly canceled services and cut costs while shifting from linear TV. In addition, Roku (NASDAQ:ROKU) appeared too focused on content distribution easily transferrable to competitors and a function other DTC video streaming services hoped to avoid when moving to stream.
According to ARK Invest, the significant shift in the business is a move toward video advertising. Even Netflix (NFLX) is looking toward shifting the company from a subscription-only model to one where advertising contributes to revenues, with some consumers unwilling or unable to pay a monthly subscription fee.
The Ark Invest base case is for Roku (NASDAQ:ROKU) to generate impressive 2026 revenues of $14.4 billion. Under a Bear case, the company would see revenues only grow to $3.6 billion, up from $2.8 billion last year.
The analyst community generally appears to agree with Cathie Wood on the positive momentum of the business, considering the current 2024 revenue target is $5.8 billion. Additionally, analysts see Roku (NASDAQ:ROKU) reaching the Bear case revenues this year and at least approaching half the Base case by 2026.
The primary thesis of the revenue boost is a logical increase of global households connected with TVs leading to Roku (NASDAQ:ROKU) Active Accounts tripling. ARK Invest forecasts CTVs growing to 1,253 million in 2026, up from 739 million. This number doesn’t appear stressed; the big question is whether Roku (NASDAQ: ROKU) can triple Active Accounts to 157 million.
In the process, Daily Hours streamed on the platform will grow approximately 25% per day to 4.5 hours, and the monetization will surge. As a result, the gross platform rate per hour would reach $0.21, and the net platform rate would grow 60% to $0.05.
The shift to AVOD (advertising-based video-on-demand) services is a big key in the model. Most importantly, Roku (NASDAQ:ROKU) could grow 10% of total streaming hours from The Roku (NASDAQ:ROKU) Channel to 15% in a Base case and 18% in a Bull case. Those additional hours streaming internal content will lead to far higher monetization via OneView.
The biggest question to the thesis is whether Roku (NASDAQ:ROKU) can gain more viewership on The Roku Channel with so many services switching to AVOD models. Both Netflix and HBO Max offer services likely to attract most of the video advertising market.
Many other numbers from ARK Invest make sense, with consumers switching more and more to video streaming services and Roku (NASDAQ:ROKU) participating in the growing pie. Ad budgets will continue shifting from linear TV to digital TV services, contributing to Roku’s (NASDAQ:ROKU) growing revenues.
On top of this issue, the sector will have to contemplate how to generate profits with original content instead of just driving revenue growth in the industry. More and more consumers are shifting to steaming, but content costs continue rising as various services fight over top talent to create content. For example, Tom Cruise is predicted to hit a paycheck of up to $100 million for Top Gun: Maverick after agreeing to a deal for a $12.5 million base pay and 10% of sure profits.
Safety Net
While the ARK Invest call appears too bullish, considering Roku (NASDAQ:ROKU) would have to compete with the likes of Netflix working with Google (GOOG, GOOGL) for video ad dollars, the Bear case does provide a level of safety here, with Roku (NASDAQ:ROKU) trading at only $89. Moreover, the stock hardly budged at the opportunity for a 600% gain in another bullish sign the store is thoroughly washed out.
Roku (NASDAQ:ROKU) only trades at 2.5x 2023 sales targets in another positive sign that investors might have some protection to the downside while allowing for the bullish call to play out. However, the company isn’t expected to be profitable again next year, leading to investors not jumping on the bull case.
The company is already EBITDA profitable, providing another level of safety here. The stock plummeted from a peak of nearly $500 to only $89 now. Roku (NASDAQ:ROKU) did forecast adjusted EBITDA at only breakeven in Q2’22 due primarily to inflationary pressures, reduced TV unit sales, and lower ad spend.
In essence, Roku (NASDAQ:ROKU) struggles to generate profits despite 25% growth in the ultimate Bear case. This is because higher revenues are constantly met with higher costs in the video streaming sector.
Featured Image: Megapixl @ Mohammedsoliman4
