Takeover Talk Is One of Many Reasons to Hang Tough on Roku Stock

Roku (NASDAQ:ROKU) had a bad day on the markets Oct. 2, falling more than 6% on the day, as investors took profits on their ROKU stock.

Corrections are going to happen when a stock jumps by 65% in three months. Contrary to popular belief, stocks do not go up in a straight line. If you own ROKU stock, I’d be prepared for a few more down days like the one it just had in the closing weeks of 2018.

Fear not, however, because, in the long run, someone is going to buy Roku; it’s only a matter of time.

Alphabet Is My Guess

According to a Parks Associates survey from May, Roku had 37% market share in the streaming media player category followed by Amazon (NASDAQ:AMZN) at 28%, Apple (NASDAQ:AAPL) at 15% and Google at 14%, down 33% from two years earlier.

Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) is losing serious market share in a vital part of the smart home devices market. According to IDC’s Worldwide Quarterly Smart Home Device Tracker, the  video entertainment category accounted for 48% of all smart home devices being shipped in 2018.

While the overall market share of video entertainment devices shipped by 2022 is expected to drop to 36% as smart speakers and home security grow in popularity, the number of units shipped is projected to increase by 47% over the next four years.

In other words, Roku has the most popular streaming media player by a country mile, in a smart home devices market that’s expected to double by 2022.

It’s a big reason why I suggested at the end of August that Google should buy Roku to stop the erosion of market share that my InvestorPlace colleague, James Brumley, alluded to in an article earlier that month.

If Alphabet’s got any interest in streaming TV, it better act sooner than later because unless there’s a market correction, I don’t see ROKU stock getting much cheaper,” I wrote. 

It’s up 14% since then.

It’s Going to Keep Moving Higher

If Alphabet isn’t interested in acquiring Roku’s market share and growing advertising business, others are.

Needham & Co. analyst Laura Martin believes there are several logical candidates including Google, Amazon, Facebook (NASDAQ:FB), Verizon (NYSE:VZ) and AT&T (NYSE:T).

The reality is the actual list of interested parties is probably much more extensive. Once one company enters the arena, you can expect a bidding war to ensue.

“We believe Roku would benefit many companies strategically,” Martin wrote. “Because time-to-market is mission critical and it took Roku over a decade to build its platform, we believe large companies are more likely to try to buy Roku than spend years developing their own platform—until Roku is bought by someone else.”

Acquisition rumors are often just that. It’s possible that no one will step up to the plate. If someone does, Martin sees Amazon as the likeliest candidate.

The Bottom Line on Roku Stock

As we move into the latter stages of 2018, I like the fact that Roku’s business model continues to deliver exceptional results, growing both its active accounts and viewing hours by those accounts, the two ingredients necessary for advertising revenue growth.

So far, so good.

As long as speculation continues to percolate, it acts as a bit of floor for the Roku stock price.

Are there more gains ahead for shareholders? I think there are. Maybe not 65% in three months, but 5%-10% a quarter isn’t unrealistic given its attractiveness as a takeover target.

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/10/takeover-talk-roku-stock/.

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