Can a Takeover Save Roku Stock?

Stock Market

Is Roku (NASDAQ:ROKU) going to be acquired?

Not yet. But rumors persist that Netflix (NASDAQ:NFLX) is looking to buy the manufacturer of internet-connected television sets and other devices.

When the rumors of a takeover first surfaced on June 8, ROKU stock jumped 10% as investors grew excited about the prospect of a Netflix/Roku combination. But since then it’s been crickets. No formal announcement has been made, leaving analysts and investors wondering what’s next for Roku and its beleaguered shareholders.

ROKU Roku, Inc. $94.49

Back In the Fold?

Should Netflix actually make a play for Roku, the streaming giant would be returning Roku to its fold. This is because Roku was created within Netflix before it was spun off in 2008. Roku founder and chief executive officer (CEO) Anthony Wood was developing a set-top box for Netflix. But the streamer didn’t follow through with the idea over concerns that the device would prevent it from launching its streaming service on multiple platforms.

Acquiring Roku now does make some sense for Netflix as it would give it access to Roku’s advertising sales platform as it transitions away from a subscription-only business model. Multiple analysts have said that Netflix buying Roku makes sense given that it would enable the streamer to run targeted advertising for the first time in its 25 year history.

Plus, the timing could work as the 65% decline in ROKU stock this year has brought its market capitalization down from $60 billion to $13 billion, making it an easier pill for Netflix to swallow.

Other Issues

While the speculation of Netflix acquiring Roku might sound good, there are reasons why a deal might not materialize. The main reason is that Netflix has been weakened this year as its share price has plunged 70% on poor financial results and a drop in subscriptions. The very reason that Netflix is planning to add advertising to its service (something it previously said it would never do) is because $175 billion has been wiped off the company’s market capitalization this year.

Another concern is that Netflix’s balance sheet is under stress because of the $33 billion it has committed for content development this year. Analysts seem to agree that any bid for Roku would be an all-stock transaction as the company doesn’t have the cash needed for an acquisition. Still, Roku shareholders might welcome a buyout from Netflix given that ROKU stock is currently 81% below its 52-week high of $490.76.

Roku’s video-advertising platform, which generated $647 million in revenue during this year’s first quarter, is the company’s main revenue generator now that sales of its physical streaming devices has slowed markedly coming out of the pandemic.

Wait on ROKU Stock

Now is not the time for investors to take a position in Roku stock. The uncertainty surrounding a potential takeover by Netflix is further weighing down Roku’s share price, which was under pressure before rumors of an acquisition surfaced.

Investors should also consider that Netflix and its stock have been badly beaten up this year on news of slowing growth and an uncertain outlook. Until we know what will happen with Roku, investors should remain on the sidelines. ROKU stock is not a buy.

On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

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