Be an investor in Roku(NASDAQ: ROKU) is best described by the opening words of Charles Dickens’ novel A tale of two cities: “It was the best of times, it was the worst of times.” Since the company’s IPO at the end of 2017, the stock has risen by as much as 1,940% in less than four years. However, the combination of a post-pandemic streaming hangover and an economic downturn devastated advertising budgets and sent Roku plummeting. The stock never really regained its momentum and is still 82% below its peak.
However, in recent days, Roku stock has been on fire, gaining 28% in less than a week (at the time of writing) as investors rush to buy the stock.
Do you miss the morning spoon? Wake up with Breakfast news in your inbox every market day. Register for free »
The rally was fueled by an unlikely catalyst, and if Wall Street is to be believed, much more could happen.
Image source: Getty Images.
Roku has long been the dominant streaming platform globally and currently has a 48% market share, according to connected TV (CTV) analytics platform Pixalate. Roku served nearly 86 million streaming households in the third quarter, with those viewers approving 32 billion streaming hours – which equates to more than four hours of screen time per household per day.
In exchange for their inclusion on Roku’s dominant platform, streaming channels transfer 30% of ad inventory to Roku — and that’s how the company earns the vast majority of its revenue.
At the end of last month, The Trade Bureau(NASDAQ: TTD) – a longtime advertising partner of Roku – launched Ventura, which it describes as “a revolutionary operating system for streaming TV.” The Trade Desk developed the system with an emphasis on advertising and said it “solves key problems with today’s prevailing market systems, including frustrating user experiences, inefficient advertising supply chains and conflicts of interest in content.”
The Trade Desk promises a more engaging user experience, more streamlined streaming TV advertising, and fewer – but more relevant – ads.
However, this platform puts The Trade Desk in direct competition with Roku in the streaming platform market and could put a dent in advertising revenue. So why are Roku shares on fire? Comments from some Wall Street analysts fanned the flames.
In a letter to clients on Monday, Guggenheim analyst Michael Morris noted that while The Trade Desk’s Ventura system could compete with Roku, he hypothesized that both companies would benefit if The Trade Desk acquired Roku, especially given the long collaboration between the companies. He also noted that Roku’s market penetration is large enough that “Ventura would have a long climb to achieve the market penetration necessary to impact the industry.”
He wrote: “[We] to believe [The Trade Desk] could scale it up quickly [operating system] ambitions through Roku’s global footprint of more than 85 million streaming households, while Roku could quickly leverage its first-party viewership data and expand CTV inventory to meet growing advertiser demand.”
It’s important to note that the analyst said this exercise is “strictly hypothetical.” He has no insight into any plans of either company.
In an emailed statement to The Motley Fool, Melinda Zurich, vice president of communications at The Trade Desk, even called it “pure speculation,” noting, “It would be in direct conflict with our position of never owning content .’ This seems to rule out a takeover bid.
However, speculation soon increased again, fueled by Needham analyst Laura Martin. The analyst quoted Walmart‘s acquisition of Vizio for $2.3 billion. By integrating its online and offline shopper data, Walmart will have much more robust consumer data to inform its targeted advertising. This helps highlight the value of Roku’s audience and viewership data, prompting the analyst to predict that Roku would be acquired for a “large premium” in 2025.
Martin put forward several possible candidates, such as streaming giant NetflixThe Trading Desk, retailer Goaland major technology players, including Amazon, MicrosoftAnd Alphabetall of which could benefit from Roku’s wealth of viewership data. “We believe one of the most undervalued assets at Roku is its data, which it has never separately monetized,” the analyst added.
From all the talk, it’s clear that Roku would be an attractive acquisition candidate. As tempting as the rumors are, they don’t provide any reason to buy the stock.
That said, Roku is the leading streaming platform in the world and maintains a cache of valuable audience data on 85 million viewers. In the third quarter, streaming households grew 13% as the company consolidated its lead, while streaming hours rose 20%, indicating strong user engagement. This boosted revenue, which rose 16%, and Roku generated positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow for the fifth consecutive quarter. That has helped the company cut its losses by 97%, and it is on the verge of returning to profitability after a long inflation-induced drought.
To be clear, Roku shareholders have been on a roller coaster ride in recent years. Despite the volatility, however, the stock has been a big winner for long-term investors, up 261% over the past seven years (at the time of writing), easily outpacing the stock market’s 142% gain. S&P500.
Finally, at just three times the retail price, Roku offers an attractive price for an intriguing opportunity.
Before you buy shares in Roku, consider this:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Roku wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $859,528!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. TheStock Advisoris on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns December 2, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena holds positions at Alphabet, Amazon, Microsoft, Netflix, Roku and The Trade Desk. The Motley Fool holds positions in and recommends Alphabet, Amazon, Microsoft, Netflix, Roku, Target, The Trade Desk and Walmart. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
The Trade Desk just made a big move that has investors scrambling to buy Roku stock. Originally published by The Motley Fool
