Three months ago, it was rumored that Netflix (NFLX 1.27%) was about to launch an offer to buy for Roku (ROKU 0.64%). Fueled by this chatter, Roku’s stock price rose nearly 18% in three days. When the takeover talk faded, Roku stock lost that gain and more over the next three days.
But investors haven’t stopped thinking about this idea. “Should Netflix Buy Roku?” it’s still a popular search term and for good reason. Let me show you why this fusion idea keeps coming back and why it probably won’t translate into the real deal any time soon.
Three reasons why Netflix should buy Roku
The two streaming companies have a lot in common and have been working together since before video streams were a thing. In fact, Roku started as an internal division of Netflix, developing a device called the Netflix Player to move the newest digital videos from laptops to living room TVs. Pairing the Netflix content experience with Roku’s media viewing platform makes a lot of sense. They are the peanut butter and grape jelly of the video streaming market. These companies belong together, so maybe Netflix should buy its smaller partner.
And Roku is buzzing these days! It’s best to make an opportunistic takeover at a low price and Roku’s stock hangs in the Wall Street business basket. Share prices had dropped 56% year to date as those buyout rumors made the rounds in June. Now, the stock is down 69%. Roku’s market cap has dropped to just $ 9.6 billion. Calculating $ 2.1 billion in cash reserves and just $ 720 million in long-term debt, you’ll get $ 8.2 billion in business value. Enterprise value peaked at over $ 60 billion last summer, so Roku is the real deal today. Netflix can’t pay in cash, but the content titan is more than 10 times the size of Roku, and a stock swap deal should work.
Finally, Netflix could be using something bright and new right now. Subscriber growth has slowed over the past few quarters, and Netflix is considering many new ideas to reignite that stalled growth engine. Taking direct control over the leading streaming platform in North America could do the trick. If nothing else, Roku’s experience in video-based advertising should come in handy when Netflix launches an ad-supported service plan.
Three reasons why Netflix won’t buy Roku
I’ve already talked about Netflix’s limited cash reserves, which stopped at $ 5.8 billion in the second quarter. Financing a more debt acquisition of Roku would also be inconvenient as Netflix recently focused on paying off its $ 14 billion long-term debt load. The structure of the share-based transaction would also make shareholders contort. This deal would dilute Netflix’s shares by more than 10%, almost equaling the total dilution of the past 10 years.
Strategically, Netflix is no stranger to acquisitions, but the deals are about adding more content and video games to the company’s library. It would be out of place to grab a hardware and software expert like Roku, who pushes Netflix into certain markets that it doesn’t want to touch. In fact, when Roku was spun off from Netflix in 2007, the main reason for the move was that Netflix didn’t want to compete with its tech partners. In this way, Netflix was free to create a platform-independent streaming service while Roku was able to create a service-independent streaming platform. You’ll find dedicated Netflix buttons on virtually all modern TV remotes, and Roku’s media platform supports nearly all noteworthy video streaming services. Combining the two companies under a single corporate umbrella would wipe out these fantastic market positions.
And of course, there are no guarantees that regulators would allow a Netflix-Roku combo as well. Putting the biggest platform in the hands of the biggest content creator is an antitrust lawsuit waiting to take place. I’ve already talked about how a merger would destroy some of Roku and Netflix’s most valuable commercial advantages, but critics would continue to call the deal anti-competitive and unfair. Regulatory reviews and court cases could go on for years. Netflix doesn’t need this distraction from its core business right now.
So the fusion idea may seem sensible on the surface, but it falls apart as soon as you start digging deeper. I’m happy enough to own both Netflix and Roku as standalone stocks. Both have huge long-term growth prospects ahead of them and both are easy purchases to buy today.
Anders Bylund has locations in Netflix and Roku. The Motley Fool has locations and recommends Netflix and Roku. The Motley Fool has a disclosure policy.