Is the Roku share price a must-watch on Netflix bid talk?

The Roku [ROKU] share price hit one-month highs last week after a Business Insider report suggested the company was an acquisition target for streaming giant Netflix [NFLX]. The shares then dropped, but were lifted again on Friday 17 June after Roku announced a new ecommerce deal with retail giant Walmart [WMT].

According to consumer insights firm Hypothesis Group, Roku is the leading TV operating system in the US, Canada and Mexico based on hours streamed, with more than 61m active accounts as of October 2021. The company offers streaming platforms to consumers and provides revenue opportunities with streaming companies through partnerships and advertising — but it’s the latter that may be of most interest to Netflix.

A potential Roku-Netflix deal could see the companies reunite after Roku was spun out from Netflix back in 2008 by its co-CEO and co-founder Reed Hastings, on worries that owning its own platform would make it difficult for Netflix to distribute its streaming app across other devices.

What’s happening with Roku’s share price?

Roku’s share price jumped 13.31% to an intraday high of $105.85 on 8 June after the Netflix story broke, but has since fallen back, possibly over doubts over whether the deal will ultimately materialise. The shares plunged to a 52-week low at $72.63 on 14 June, but confirmation of the deal with Walmart has helped Roku stock to climb 13.48% since then to Friday 17 June’s close at $82.42.

The prevailing trend, however, as with most tech stocks, is one of heavy declines. Roku shares have sunk 83.21% from last July’s 52-week high at $490.76, as weaker demand for video streaming and lower set-top-box sales in the current economic climate takes its toll.

Will Netflix buy Roku?

With Roku staff discussing a potential Netflix takeover, Roku unexpectedly closed its employee trading window. The timing of any deal now would appear to be advantageous for Netflix, with Roku’s valuation plunging below $12bn, making it much more palatable than a year ago when it was much higher. “It makes sense with where Netflix wants to go… and it makes sense in this current environment”, a technology investment banker told Business Insider.

Netflix, which has seen its stock plunge 70% year-to-date, is looking to boost growth to combat subscriber loss and rising competition from rivals such as Amazon Prime [AMZN] and Disney+ [DIS]. There have also been reports that Netflix plans to introduce advertising to its service. Owning Roku would give it a significant advantage in terms of viewers’ streaming habits, including across rival streaming channels through Roku boxes.

The benefits for Netflix are fairly clear, but would the deal be in Roku’s best interests? Roku is a favourite of the ARK Invest stable — the stock is the third-largest holding in ARK Innovation ETF [ARKK] with an 8.54% weighting, and the second-biggest holding in the ARK Next Generation Internet ETF [ARKW], with an 8.57% weighting. Associate portfolio manager Nicholas Grous, wrote in ARK Invest’s newsletter on 13 June: “In our view, Netflix would gain much more than Roku… with a robust advertising business in the connected TV space, Roku could fast-track Netflix’s ambitions.”

With Roku “in the process of rebuilding the TV ecosystem on digital rails”, according to Grous, the company might be more suited agreeing to an advertising partnership instead. This assessment may account in part for Roku’s share price sliding following the initial jump higher.

Walmart deal offers fresh opportunity

However, the revelation after last Thursday’s US market close of a deal between Roku and Walmart, where viewers will be able to use their remote device during a TV commercial to choose a product and go directly to checkout using its payments platform Roku Pay, helped reverse its stock decline.

Users will just need to confirm on the Walmart checkout page, allowing the order to be processed instantly, with shipping, return and support information following by email. Peter Hamilton, head of TV commerce at Roku, said: “We’re making shopping on TV as easy as it is on social… for years, streamers have purchased new Roku devices and signed up for millions of subscriptions with their Roku remote. Streaming commerce brings that same ease and convenience to marketers and shoppers.”

The announcement is a first for the streaming sector, and provided a timely reminder of Roku’s enduring capabilities and attractiveness as a partner in the space.

What’s next for Roku stock?

The 26 analysts offering 12-month price targets for Roku have a median target of $156.50 according to the Financial Times, representing a potential upside of 89.9% from its 17 June closing price of $82.42. Analysts remain bullish on the company, with eight ‘buy’ and 12 ‘outperform’ recommendations. Alongside these, seven analysts rate Roku stock a ‘hold’, while just two have an ‘underperform’ rating.

Time will tell if Roku will return as part of Netflix’s stable some 14 years after its separation, but the company’s reiterated guidance for 35% year-on-year revenue growth in April and its freshly announced deal with Walmart suggest that even if the acquisition doesn’t take place, Roku’s long-term future looks rosy.