Roku investors taken on Netflix M&A-rumor ride

Investors piled into Roku Inc. on June 8 after reports that Netflix Inc. may acquire the company. A day later, they piled out.

Roku closed on June 8 up about 9%. On June 9, shares closed down a little more than 9%. Netflix shares added about 2% on June 8, only to end down almost 5% on June 9.

Roku employees are speculating that Netflix is ​​considering acquiring the smaller streaming company, according to a report from Business Insider. A deal between the two would not only give Netflix an advertising-based streaming platform, but it would also come with Roku’s connected TV hardware business and adverting technology and licensing business.

Such a deal would represent Netflix’s largest transaction to date, and it would come at a time both companies have fallen precipitously from pandemic-era highs.

Like Netflix, Roku generated considerable investor interest during the pandemic when consumers explored new streaming options; both companies have since lost that market capital.

For the year ended June 8, Roku shares were down 70.1% and Netflix shares were off by 58.8%. Netflix’s market capital of $86.86 billion was about 7x that of Roku at $12.71 billion. That values ​​Netflix at about 3.1x its trailing-12-month revenue and Roku at about 3.8x trailing-12-month revenue.

Both companies have seen revenue growth taper in recent quarters but on different orders. Roku saw its revenue skyrocket in the second half of 2020 and the first half of 2021. The company in the second quarter of 2021 revenue grew 82.1% above the second quarter of 2020, which itself was 42.4% above the same quarter in 2019. , the company has reported a steady deceleration since then, with revenue up just 27.8% in the most recent quarter.

Netflix’s biggest growth quarters are farther in the past. The company has seen revenue growth steadily slow from 27.6% in the first quarter of 2020 to 9.8% in the most recent quarter.

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Netflix held about $6.03 billion in cash at the end of the most recent quarter. The company rarely undertakes M&A transactions, accquiring only a dozen or so companies since 2012, according to S&P Global Market Intelligence.

Only one of Netflix’s M&A transactions came with a disclosed transaction value, the pending $73.0 million acquisition of Next Games Oyj. Netflix is ​​using that March 2022 acquisition to launch a gaming product, which company executives say will provide a new line of revenue and growth.

Netflix is ​​also exploring adding advertising-based streaming to its subscription-only platform in order to drive subscriber growth. Historically, Netflix’s executives have declined the idea, arguing that the company’s ad-free subscription model is part of its appeal. However, company CEO Reed Hastings recently said he was open to adding an ad-based streaming tier after Netflix posted a massive membership miss for the first quarter of 2022.

“Those who have followed Netflix know that I’ve been against the complexity of advertising and a big fan of the simplicity of subscription. But as much I’m a fan of that, I’m a bigger fan of consumer choice. And allowing consumers who would like to have a lower price and are advertising-tolerant get what they want makes a lot of sense,” Hastings said.

The company reported 221.6 million global streaming paid memberships in the first quarter, down from 221.8 million in the prior quarter, representing the first decline in memberships in a decade. The company guided for another decline in the second quarter at 219.6 million.

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