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Cathie Wood’s ARK Invest has struggled after a fantastic 2020. ARK Innovation ETF (ARKK 3.59%) shares have fallen over 77% from their all-time highs.

While the firm’s outcomes may change, its investing approach does not. ARK Invest continues to invest in innovative growth companies, and it has grown increasingly bullish on Roku (ROKU 3.42%). As of this writing, the streaming platform is ARK’s third largest holding across all of its ETFs.

Why, you may ask? Cathie Wood and ARK Invest have set an extremely bullish price target of $605 for the firm by 2026, implying a 1,050% return from the stock’s present price of around $52.60. Is this pricing point, however, within Roku’s grasp?

Wood may be overconfident…

Many growth investors that invest in risky firms are attempting to outperform the S&P 500 index, which has returned around 11.9% each year since 1957. When investors strive to “beat the market,” many of them expect to earn merely a few percentage points extra every year. As a result, Wood’s Roku price target of $605 may be too high.

This price target forecasts a price increase of more than 1,000% in only four years, representing a compound annual growth rate of more than 84%. In other words, Wood expects Roku’s stock price will rise 84% each year (on average) over the next four years.

While outperforming the market has been done in the past, that price prediction anticipates some highly uncommon price appreciation. In comparison, Apple has returned around 518% over the last decade. While that has far outperformed the market, it is barely half of what Wood forecasts for Roku (over an even shorter period).

Not to mention the challenges that Roku will face in the future year or two. With the current state of the American economy, Roku faces two challenges.

First, customers are less inclined to spend money on luxury items such as televisions right now. Second, the hard macro climate is prompting businesses to reduce ad expenditure, which is where Roku generates most of its money. As a result, Roku revised its Q3 sales projection, predicting only a 3% year-over-year revenue increase for the period.

Not only that, but Roku’s profits have plummeted in recent quarters. Roku’s trailing-12-month free cash flow was about $200 million at the start of 2022, but it has since dropped to a burn of $5 million. The same is true for net income during the previous 12 months.

But she could be onto something.

While Cathie’s price goal may be too high, there are still reasons to be bullish about Roku in the long run. Streaming is rapidly growing in popularity, lately surpassing cable TV in terms of usage. The Trade Desk reports that 109 million households in the U.S. had connected TV streaming in 2021, a significant increase over the 68.5 million cable subscriptions during the same time period.

Streaming may be on the rise, however, advertisers have yet to adapt. Advertisers are expected to spend just 22% of their TV ad spending on streaming in 2022, whereas Americans aged 18 to 49 spent 50% of their TV time streaming in the second quarter of 2022. These rates are expected to converge in the long run as marketers see the value of advertising on streaming platforms.

Given that Roku is the most popular streaming platform in the United States, Canada, and Mexico, with over 63 million active users, the company appears to be best positioned to capitalize on this tremendous potential.

Author: Blake Ambrose

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