At first glance, this looks like a match made in heaven. So why won't the two media-streaming giants tie the proverbial knot?
Three months ago, rumor had it that Netflix(NFLX 3.08%) was about to launch a buyout bid for Roku(ROKU -0.68%). Fueled by this chatter, Roku's stock price rose nearly 18% in three days. When the buyout talk faded out, Roku shares lost that gain and much more over the next three days.
But investors haven't stopped thinking about this idea. "Should Netflix buy Roku?" is still a popular search term, and for good reason. Let me show you why this merger idea keeps coming back -- and why it probably won't result in an actual deal anytime soon.
The two streaming companies have a lot in common, and they have worked together since before video streams were a thing. In fact, Roku started out as an internal division of Netflix, developing a device called the Netflix Player to move the brand-new digital videos from laptops to the living room TV. Matching Netflix's content expertise with Roku's media-viewing platform makes so much sense. They are the peanut butter and grape jelly of the video-streaming market. These companies belong together, so maybe Netflix should buy its smaller partner.
And Roku is on fire sale these days! An opportunistic takeover is best done at a low price, and Roku's shares are hanging out in Wall Street's bargain bin. Share prices had fallen 56% year to date when those buyout rumors made the rounds in June. Now, the stock is down by 69%. Roku's market cap is down to just $9.6 billion. Factor in $2.1 billion of cash reserves and just $720 million in long-term debt, and you get an enterprise value of $8.2 billion. The enterprise value peaked at more than $60 billion last summer, so Roku is quite a bargain today. Netflix can't quite make that payment in cash, but the content titan is more than 10 times larger than Roku and a stock-swap deal should work.
Finally, Netflix could use something shiny and new right now. Subscriber growth has slowed down in recent quarters and Netflix is considering many new ideas to reignite that stalled growth engine. Taking direct control over the leading streaming platform in North America might do the trick. If nothing else, Roku's experience in video-based advertising should come in handy when Netflix launches an ad-supported service plan.
I already talked about Netflix's limited cash reserves, which stopped at $5.8 billion in the second quarter. Financing a Roku buyout with more debt would also be uncomfortable since Netflix has focused on paying down its $14 billion long-term debt load recently. Even the stock-based deal structure would make shareholders squirm. This deal would dilute Netflix's stock by more than 10%, nearly matching the total dilution over the last 10 years.
On a strategic level, Netflix is no stranger to buyouts, but the deals are all about adding more content and video games to the company's library. It would be out of character to grab a hardware and software expert like Roku, shoehorning Netflix into some markets that it doesn't want to touch. In fact, when Roku was spun off from Netflix in 2007, the main reason for the move was that Netflix didn't want to compete against its technology partners. This way, Netflix was free to build a platform-neutral streaming service while Roku could create a service-neutral streaming platform. You'll find dedicated Netflix buttons on pretty much every modern TV remote, and Roku's media platform supports just about every video-streaming service worth mentioning. Combining the two companies under a single corporate umbrella would erase these fantastic market positions.
And of course, there are no guarantees that regulators would even allow a Netflix-Roku combination to happen. Putting the largest platform in the hands of the largest content creator is an antitrust lawsuit waiting to happen. I already talked about how a merger would destroy some of Roku's and Netflix's most valuable business advantages, but critics would still call the deal anti-competitive and unfair. The regulatory reviews and court cases could drag out for years. Netflix doesn't need that distraction from its core business right now.
So the merger idea may look sensible on the surface, but it falls apart as soon as you start digging deeper. I'm quite happy to own both Netflix and Roku as stand-alone stocks. Both have tremendous long-term growth prospects ahead of them and both areno-brainer buys today.
Anders Bylund has positions in Netflix and Roku. The Motley Fool has positions in and recommends Netflix and Roku. The Motley Fool has a disclosure policy.
The enterprise value peaked at more than $60 billion last summer, so Roku
Roku
(/ˈroʊkuː/ ROH-koo) is a U.S. listed company founded by Anthony Wood in 2002. It runs a streaming service through Roku-branded streaming players and smart TVs, supporting both advertising and subscription models on its platform.
is quite a bargain today. Netflix can't quite make that payment in cash, but the content titan is more than 10 times larger than Roku and a stock-swap deal should work.
Roku is the top smart-TV operating system in the U.S., putting it in a prime position to benefit. Shares are very cheap, adding upside for long-term investors.
With its 2-star rating, we believe Netflix's stock is overvalued compared with our long-term fair value estimate of $440, which implies a multiple of 24 times our 2024 earnings per share forecast.
It said it's going to work on innovation and growth in 2024. If it can leverage its more efficient operations to grow while maintaining progress in profitability, 2024 could be a big year for Roku stock.
Roku is expected to publish Q1 2024 results toward the end of this month. While the advertising market has seen headwinds over the past year, as businesses held back due to weak consumer spending, we expect Roku to see a recovery over Q1.
The average price target for Roku is $74.88. This is based on 18 Wall Streets Analysts 12-month price targets, issued in the past 3 months. The highest analyst price target is $105.00 ,the lowest forecast is $50.00. The average price target represents 27.96% Increase from the current price of $58.52.
Since that time, Roku's gross profit margin rates for its advertising business have also dwindled from more than 60% to a figure closer to 50%. This suggests the company has a pricing-power problem, a cost problem, or a combination of both.
Is Netflix stock a Buy, Sell or Hold? Netflix stock has received a consensus rating of buy. The average rating score is Baa2 and is based on 64 buy ratings, 25 hold ratings, and 7 sell ratings.
Netflix hit its record high of 700.99 back in November 2021. Netflix stock has an IBD Relative Strength Rating of 90 out of 99. The rating shows how a stock's price performance stacks up against all other stocks over the last 52 weeks. It has a best-possible IBD Composite Rating of 99.
Netflix (NFLX -0.49%) is the world's largest streaming platform for movies and television shows. According to the company's earnings report for the first quarter of 2024, it extended its lead at the top of the industry as its subscriber base grew to a new record high.
The company boasts 76 million active accounts and should continue to add revenue-generating users over the next few years. As the streaming market evolves, Roku's unique platform positions it to benefit from market growth regardless of who's winning the streaming service wars.
What percentage of Roku (ROKU) stock is held by retail investors? According to the latest TipRanks data, approximately 20.23% of Roku (ROKU) stock is held by retail investors. Who owns the most shares of Roku (ROKU)? Cathie Wood owns the most shares of Roku (ROKU).
The Roku stock holds sell signals from both short and long-term Moving Averages giving a more negative forecast for the stock. Also, there is a general sell signal from the relation between the two signals where the long-term average is above the short-term average.
According to the latest long-term forecast, Roku price will hit $65 by the end of 2024 and then $85 by the end of 2025. Roku will rise to $110 within the year of 2026, $125 in 2027, $150 in 2029 and $200 in 2033.
Roku's smart platform is certainly easy to recommend. It's a one-stop shopfront for every subscription service you'd likely sign up for, complemented by free content and a simple, intuitive interface.
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