If Netflix Acquires Roku, It Could Be A Match Made In Heaven

Roku (NASDAQ: ROKU) shares surged on Wednesday on employee rumors of a potential acquisition by netflix (NASDAQ:NFLX). Reports seemed to gain momentum when “Roku abruptly closed the trading window for all employees, prohibiting them from selling any of their acquired stock at a time when they would normally be able to do so,” according to a report. of Business Internciting “people familiar with the matter”.

Netflix and Roku declined to comment on the rumors and there could be other reasons to restrict trade, but it raises the intriguing possibility that Roku’s digital advertising prowess could be just what Netflix needs to kickstart its growth. decreasing number of subscribers.

Image source: Getty Images.

Pain as a catalyst for change

After years of strong subscriber gains, Netflix suddenly reversed course in the first quarter, a hangover from its pandemic-fueled growth spurt. And to say that Netflix investors were put off by its financial report would be an understatement. The stock crashed, losing 35% of its value in a single day after the earnings release, as the streaming giant announced its first subscriber loss in over a decade. Management added fuel to the fire, saying that in addition to the 200,000 subscribers it lost in the first quarter, it expected to lose another 2 million in the second quarter.

The media landscape has undergone a rapid transformation in recent years, causing streaming executives to reconsider some long-held beliefs. Indeed, after its disastrous results – and after years of denial – Netflix CEO Reed Hastings has finally acknowledged the need for an ad-supported tier, which could come as soon as the end of this year. This shift in strategy highlights a key strength of Roku and why it would be a perfect match for Netflix.

The remedy for what afflicts you

Roku is much more than the company’s namesake set-top box. It’s also the leading aggregator of paid and ad-supported streaming services, with over 10,000 streaming channels in one place. This industry-leading position has helped Roku attract more than 61 million active household accounts. This in turn gives the company bargaining power with ad-supported streaming services, charging a 30% cut of all ad space that appears on its platform. It then uses a treasure trove of viewer data to inform its targeted advertising. That ad revenue helped Roku’s platform segment generate $647 million in the first quarter, up 39% year-over-year.

Hasting said on the conference call, “I’ve been against the complexity of advertising and a big fan of the simplicity of subscription.” Roku’s experience in digital advertising would help solve the “complexity” problem and provide Netflix with a new avenue for subscriber growth and an additional revenue stream fueled by a cheaper, ad-supported tier – Roku doing the heavy lifting.

Does such an agreement make sense?

There are other reasons to believe that now would be the perfect time for such a couple. Roku stock fell 80% from its November peak at market close on Tuesday, bringing its price-to-sales ratio down to nearly 4, a level not seen in more than three years. That puts its market capitalization at less than $13 billion, making an acquisition a lot more palatable to Netflix, especially in an all-stock deal.

Roku investors would likely need at least a 30% premium to approve such a deal, but it would still cost Netflix less than $17 billion, a boon for a company that generated $2.77 billion in revenue. dollars last year, while consistently being profitable and generating strong operating operations. cash flow.

It should be noted that the Roku device was actually developed at Netflix in 2007, before being spun off. At the time, Hastings feared alienating the company’s partners, who included the ubiquitous red “Netflix” buttons on their remotes at the start of streaming, helping the company become the dominant force in the space that she popularized.

Netflix stock is down 70% from its recent high as investors wonder if the company’s best days are in the rearview mirror. Management also appears to be considering all options to formulate a plan to kick-start its subscriber growth. It seems like it would be the perfect time for Netflix to welcome home its prodigal son, Roku.

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Danny Vena has positions at Netflix and Roku. The Motley Fool holds posts and recommends Netflix and Roku. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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