Current Situation:
- Roku's stock is up +10% because of a report that Netflix may acquire the company
- More details about the report: Roku Stock Jumps After Report of Potential Netflix Takeover – TheStreet
Why I don't think a deal will happen:
- None of the TV streaming service companies (Disney+) will like that their #1 competitor also owns the #1 TV streaming platform
- Netflix most likely will have to dilute their shareholders by a significant margin since I expect a hypothetical deal would have to be all-stock.
Entertaining the possibility of a deal:
- Roku has recently closed the window during which employees can sell their vested stock grants
- As I mentioned, this will most likely need to be an all-stock deal because Netflix needs to prioritize its $33 billion in content spend to minimize their subscriber churn in a competitive environment, their balance sheet is loaded with debt, and they have a junk grade credit rating
- Roku will help Netflix in a couple of ways including targeted advertising on Roku's platform of +60m accounts to get users to return/join Netflix, help transition from a subscription-only model to a hybrid ad model, and a lot of competitive benefits of vertical integration to have the #1 TV streaming service to be combined with the #1 TV streaming platform.
- Link is a scenario analysis of possible outcomes if Netflix acquires Roku. In my view, a fair deal for ROKU would be atleast a +10x EV/Revenue multiple, +40b market cap, or ~$290/share. That would be almost half of Netflix's market cap so I don't see a deal happening, but I could be wrong.
- My scenario analysis: Imgur: The magic of the Internet
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