Being an investor in Roku(NASDAQ: ROKU) could best be described by the opening words of the 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 in late 2017, the stock soared as much as 1,940% in less than four years. However, the combination of a post-pandemic streaming hangover and economic downturn ravaged advertising budgets and sent Roku plunging. The stock has never really regained its momentum and still sits 82% off its peak.
Over the past few days, however, Roku stock has been on fire, notching 28% gains in less than a week (as of this writing) as investors scramble to buy the stock.
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The rally was sparked by an unlikely catalyst, and if Wall Street is to be believed, there could be much more to come.
Image source: Getty Images.
Increasing competition?
Roku has long been the dominant streaming platform worldwide and currently has a 48% market share, according to connected TV (CTV) analytics platform Pixalate. Indeed, Roku served nearly 86 million streaming households in the third quarter, with those viewers racking up 32 billion streaming hours -- which amounts to more than four hours of screentime per household per day.
In return for being included on Roku's dominant platform, streaming channels turn over 30% of the advertising inventory to Roku -- which is how the company makes the vast majority of its revenue.
Late last month, The Trade Desk(NASDAQ: TTD) -- a longtime advertising partner of Roku's -- launched Ventura, which it describes as "a revolutionary streaming TV operating system." The Trade Desk developed the system with a focus on advertising, saying it "solves key issues with prevailing market systems today, including frustrating user experiences, inefficient advertising supply chains, and content conflicts of interest."
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 its advertising revenue. So why is Roku stock on fire? Comments by a couple of Wall Street analysts stoked the flames.
Takeout target?
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, particularly given the long partnership 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] believe [The Trade Desk] could rapidly scale its [operating system] ambitions via Roku's 85 million+ global streaming household footprint, while Roku could quickly leverage its first-party viewer data and expanding CTV inventory to match with growing advertiser demand."
It's important to note that the analyst said this exercise is "strictly hypothetical." He doesn't have any insight into any plans either company may have.
In fact, in an emailed statement to The Motley Fool, Melinda Zurich, vice president of communications at The Trade Desk, called it "pure speculation," noting, "It would be in direct conflict with our position to never own content." This would seem to rule out any takeover bid.
However, speculation soon ramped up again, egged on by Needham analyst Laura Martin. The analyst cited Walmart's $2.3 billion acquisition of Vizio. 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 viewer data, prompting the analyst to predict that Roku would be acquired for a "big premium" in 2025.
Martin floated several possible suitors, such as streaming giant Netflix, The Trade Desk, retailer Target, and big tech players including Amazon, Microsoft, and Alphabet, any one of which could benefit from Roku's treasure trove of viewer data. "We believe that one of the most undervalued assets at Roku is its data, which it has never separately monetized," the analyst added.
What does this mean for investors?
It's clear from all the chatter that Roku would make an attractive acquisition candidate. As enticing as the rumors are, however, they don't present any reason to buy the stock.
That said, Roku is the leading streaming platform worldwide and maintains a cache of valuable audience data on 85 million viewers. In the third quarter, streaming households grew 13% as the company padded its lead, while streaming hours jumped 20%, pointing to strong user engagement. This fueled revenue, which rose 16%, and Roku generated its fifth consecutive quarter of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow. That helped the company slash its losses by 97%, and it's on the verge of returning to profitability after a long inflation-fueled drought.
To be clear, Roku shareholders have been on a roller-coaster ride in recent years. However, despite the volatility, the stock has been a big winner for long-term investors, up 261% over the past seven years (as of this writing), far outpacing the 142% gains of the S&P 500.
Finally, at just 3 times sales, Roku offers an attractive price for an intriguing opportunity.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena has positions in Alphabet, Amazon, Microsoft, Netflix, Roku, and The Trade Desk. The Motley Fool has 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 on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
