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What Dataxu Acquisition Means for Roku Stock

Roku (ROKU) announced it has acquired ad-management platform Dataxu for $150 million. The move should make the digital streamer even more sticky as its competitors attempt to take share away from the fast-growing company.

In this article we'll look at the terms of the deal and what it could mean for the long-term growth prospects of ROKU.

Terms

Roku entered into an agreement to acquire Dataxu for $150 million in cash and stock. Roku CEO, Anthony Wood, said the "acquisition of Dataxu will accelerate our ad platform while also helping our content partners monetize their inventory even more effectively.”

Dataxu offers marketers the ability to automate the bidding process with software they can use to manage their ad campaigns across a variety of digital platforms.

Roku management said the acquisition will be complementary to its existing ad platform, which will allow users to plan, acquire and optimize ad spend with OTT and TV providers.

The boards of both companies have approved the deal, which is expected to close by the end of 2019.

Potential for Roku

Roku noted in the announcement that traditional TV generates over $70 billion in ad revenue, citing Magna Global. While OTT makes up 29 percent of overall TV viewing, it only accounts for three percent of the total TV ad budgets.

The company believes that by adding robust automated media buying options, it will "unlock more advertising investment into OTT." With that being the probable outcome, it positions Roku for significant long-term growth as it captures more of the ad spend.

In June, comScore said that Roku is, as of June 2019, the market leader in ad-supported streaming hours. At the end of June it also had over 30.5 million active accounts.

This comes at an opportune time for Roku, as it has been increasingly transitioning from its Player segment being the primary driver of revenue, to its Platform segment producing the most sales.

This is of course important because the Player segment, which represents the hardware side of the business, has limitations after market saturation. Platform on the other hand has a lot of room for growth, as that segment includes revenue from sources including licensing and advertising.

Platform generates revenue from subscriptions and advertising, with advertising having a lot of long-term potential for sustainable growth.

The company offers ads within the videos, on its screen saver, and on its home screen, providing various touch points to the viewers.

Taking into account in the last quarter the Platform segment of Roku represented over two-thirds of overall sales, and advertising is the largest part of that segment, it's apparent that this is a part of the company that has a lot of legs to it.

Revenue from Platform jumped to $167 million, up 86 percent year-over-year. Total revenue reached $250.1 million, confirming the increasing importance of ad revenue to Roku's performance.

The major challenge for Roku is in regard to competitors like Comcast offering alternative hardware such as the Xfinity Flex box. The idea is that if that is how it plays out, other competitors will follow suit, threatening the growth potential of Roku.

While it definitely could slow down Roku, the company does have a strong connection with users via its Roku TV, which represent over a third of all smart TV sales in the U.S. That should allow it to remain sticky in that part of the business.

Consensus Verdict 

Overall, the word hovering around this streaming platform giant points to the bulls, as TipRanks analytics exhibit ROKU as a Buy. Out of 15 analysts polled in the last 3 months, 10 are bullish on ROKU stock while 3 remain sidelined, and 2 are bearish. However, the 12-month average price target stands at $129.21, which aligns evenly with where the stock is currently trading. (See ROKU stock analysis on TipRanks)

Conclusion

Roku is the market leader in the U.S. for the streaming device market, which combined with Amazon, represent approximately 70 percent of the market. It is further behind internationally, and that's where a lot of its future growth in its Player segment should come from.

All of this is important because if the company does start to lose Player share, it will also lose advertising dollars because consumers won't be viewing the ads through their service.

I think it's not going to be as easy as some competitors just throwing out some free streaming devices out there and Roku losing a lot of share. There probably is some commodity factor involved there, but there is also brand strength and the relationship between Roku and many of its users.

For now, I think the acquisition of Dataxu is a good move that will improve the performance of Roku. With a lot of international growth potential, I don't believe Roku is in danger of suddenly imploding because of slowing domestic sales, if that's how it plays out.

Until and if potential competitors offer streaming box alternatives to Roku, the company remains on solid footing. And if they do, investors still need to wait to see if they gain any traction against the desirable Roku hardware and service.

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