This has been a good week to own Roku (ROKU -3.08%), but owning it may not be good for long. Shares of the top dog in smart TV operating systems have soared 19% through the first four trading days of the week. A pair of analyst moves have spurred the rally.
The first pop came on Monday, after Michael Morris at Guggenheim proposed a purely hypothetical scenario in which The Trade Desk (TTD -1.68%) would acquire Roku after the programmatic advertising leader developed its own operating system for smart TVs. The next pop happened on Wednesday, after longtime bull Laura Martin at Needham suggested that Roku will be gobbled up at a premium at some point in 2025. A likely kinder regulatory climate for buyouts finds Martin listing half a dozen logical buyers.
It's always good to be wanted, but this isn't the kind of attention that Roku needs. A stock that soars as an acquisition target just as easily falls after the buzz fades away. Roku isn't likely to find a match in the coming year. Let's explore a couple of reasons why Roku should continue to be a swinging single in 2025.
1. Winners don't need an exit strategy
Shares of Roku have soared 70% since bottoming out in August. The stock has more than doubled since the start of last year. Companies on the rise don't need to pull the ripcord. That rise also makes it harder for a potential acquirer to even consider making an offer. You're going to need a substantial premium to incentivize Roku's board and eventually its shareholders to consider a buyout.
Roku has been a historically volatile stock, but the same can't be said about its business. It continues to grow its user base. It's now serving 85.5 million households, a 13% increase over the past year. Usage keeps growing even faster, as the hours of content streamed through Roku's platform have soared 20% over the same time.
Despite the perpetual rise in engagement -- with the average household spending more than four hours a day cradling the Roku remote -- it's not all good news. The once-profitable Roku is currently in the red. It also saw its average revenue per user (ARPU) take a hit two years ago as the connected TV market that's essential for the free platform's monetization sputtered.
It's a much healthier climate now for the streaming service pioneer. Roku's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and trailing free cash flow have been positive for five consecutive quarters. The operating loss in its latest quarter is its smallest in more than two years. A return to profitability can happen soon for Roku, which keeps growing in popularity with every passing update.
Image source: Getty Images.
2. Walmart will regret not buying Roku
Walmart (WMT -1.22%) finally closed on its $2.3 billion purchase of Vizio earlier this week. This is likely the catalyst for Wall Street pros playing matchmaker. Let's take a closer look at that deal.
Walmart didn't buy Vizio for its hardware business, even though that low-margin segment accounted for two-thirds of Vizio's revenue. You will see the Vizio TV brand fade at this point. Retailers will stop stocking the TVs now that it's wholly owned by a rival. And unfair as it may seem, the association with the country's largest discount retailer will damage Vizio's reputation for quality.
Walmart bought Vizio primarily for its SmartCast operating system for smart TVs. The math never made sense. Roku had quadruple the audience of SmartCast, and its ARPU was 30% higher, so Roku's platform revenue was 5 times higher than Vizio's. Roku's enterprise value at the time of the deal was $7.7 billion, or 3.3 times than what Walmart paid for Vizio. Imagine buying a fringe player with a fifth of the platform revenue when you could've bought the market leader at a lower platform revenue multiple and still given Roku shareholders a 50% buyout premium.
That ship has sailed. Roku's enterprise value is now $10.4 billion, and likely to keep rising next year as it continues to dominate its niche and improve on the bottom line. The window closed on Roku as takeout fodder the moment Walmart went for a bunt single when it could've swung for the fences. The other potential buyers are titans of tech that will need more than just a regulatory-friendly shift to pull off a deal for Roku next year.
Analysts can keep dreaming up their meet-cute scenarios. There's enough meat to the Roku story for it to keep growing on its own, and that's cute.
