Svideo streaming service netflix (NASDAQ:NFLX) could try to acquire a connected television (CTV) platform Roku (NASDAQ: ROKU)according to rumors that have surfaced in recent weeks.
For now, it’s just a rumor, but Netflix has good reason to enter into a deal like this. Video content is becoming commoditized, and Netflix’s recent moves suggest it recognizes the need to pivot quickly.
Here’s what’s happening in CTV
Something monumental recently happened in the CTV space. According to Roku’s first-quarter shareholder letter, 65% of adults ages 18-49 in the United States streamed video content in March, compared to just 63% in that age group who watched traditional pay-TV. like cable and DVRs. For the first time, there were more streamers than non-streamers.
The move to CTV is a great secular growth trend that investors should pay attention to. But there are two types of streaming: paid subscriptions and ad-supported channels. And while streaming in general is the future of the industry, paid streaming services like Netflix are facing a very real headwind.
According to a recent report by market researcher Parks Associates, 32 million households in the United States can be described as service consumers. They frequently switch services and re-subscribe to services they previously dropped.
This suggests there was already a limit to how much consumers would pay for streaming as a whole. And now discretionary income is squeezed even more by inflation. According to Yardeni Research, the average consumer is spending about $180 more per month on gasoline alone this year compared to the same time last year. Therefore, consumers have to cut their spending somewhere, and that may be the money going to paid streaming services.
Indeed, research group OnePoll conducted a survey for ad-supported streaming service Tubi. The survey found that the average consumer has five streaming services, but plans to cut three soon. About 70% of respondents said changes in their personal finances were the main reason for the change.
The challenge for Netflix
Netflix kicked off the streaming revolution, and shareholders enjoyed life-changing returns when it was the only show in town. But with more competition, it’s harder to attract subscribers. And in the last trimester, Netflix lost subscribers for the first time in over a decade.
You need content that is more compelling than the other if you want to gain and retain subscribers. But generating quality content comes at a price; the company already spends billions each year on original films and series. Like the 800 pound gorilla in space, Netflix has more to spend than most competitors, but you may have to spend even more to stay on top.
Spending more strains the bottom line. It’s okay if a company can simultaneously raise prices, but it’s fair to wonder how much pricing power Netflix has left to preserve margins. It should be remembered that the company announced price increases in January, shortly before a slight drop in subscriber numbers. For service lovers, maybe it was time to jump ship from Netflix.
This is what happens when something becomes commoditized: price power diminishes and profits eventually erode. This is the challenge Netflix now faces.
Why I (Still) Love Roku Stock
I repeat, the move to CTV is real and still happening. But it is becoming more and more difficult to take advantage of the change with paid services. Netflix recognizes this, which is why it suddenly announced its intention to explore an ad-supported tier for its service. When discussing the first quarter 2022 financial results, management said it plans to add a level of advertising within a year or two, despite previous opposition to the idea.
Having an ad-supported tier will help it retain more subscribers and monetize the original content it has already spent billions of dollars on. After all, Netflix subscribers who are service buyers are more likely to upgrade to the cheaper version than cancel altogether.
But this model still requires Netflix to acquire subscribers in the first place. In contrast, Roku is able to take advantage of CTV’s growth by better monetizing the Distribution content rather than the content itself. There are over 61 million active Roku accounts streaming from various services. And Roku is able to take advantage of all of that at least a bit rather than relying on original content.
If Netflix is seriously considering acquiring Roku, it’s because the distribution may be more valuable than the content – which is why I love my Roku stock.
by Roku market capitalization is around $11.2 billion at the time of this writing, while Netflix alone has $6 billion in cash, suggesting a deal is more than doable. I think that would be a great move for Netflix shareholders.
However, as a Roku shareholder, I hope that doesn’t happen. As a standalone company, Roku has a terrific trail for above-market returns, and I hope to ride it for years.
10 stocks we like better than Netflix
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*
They have just revealed what they believe to be the ten best stocks for investors to buy now…and Netflix wasn’t one of them! That’s right – they think these 10 stocks are even better buys.
* Portfolio Advisor Returns as of June 2, 2022
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.