Roku halts employee trading of stock amid internal Netflix rumor

Roku recently suspended employee trading of its stock after an internal rumor suggested the company was an acquisition target by streaming video giant Netflix, according to a report published on Wednesday.

Financial news outlet Business Insider said the internal chatter at Roku came as the company's stock price has dropped by more than 80% since last year as consumers return to pre-pandemic shopping and streaming habits.

Roku saw significant gains during the two-year coronavirus pandemic, when consumers were largely stuck at home due to government-imposed lockdowns. The company's stock sharply increased in late 2020 when cable magnate John Malone suggested it and other streaming platforms would dominate the subscription video industry.

An increase in competition mixed with shifting consumer habits have eroded much of Roku's stock market gains over the last two years. Financial analysts also say Roku's active account growth has started to level off, suggesting the company's best days may be behind it.

Last year, the Wall Street Journal suggested Comcast Corporation was interested in an acquisition of Roku, briefly sending its stock price up. Any discussions that took place on the matter apparently fizzled out; Comcast ultimately chose to partner with some of its cable competitors over the development and integration of its own X1 platform, which is now integrated into some smart television sets.

Tuesday's report by Insider renewed the market's interest in Roku, sending its stock price over $100 a share for the first time since May 5. Its stock price is up for the week by 13% as financial experts weigh the possibility of a tie-up with Netflix.

Insider's article was sparse on details about what a deal between Netflix and Roku would look like. The news outlet also did not report which employees were discussing the rumor of a merger or strategic partnership. Executives at Roku and Netflix have not commented on the report.

A partnership between the world's most-influential streaming platform and biggest subscription-based streaming video company would not be without precedent: The company known today as Roku started as an internal project at Netflix in the early 2000s, with Roku's current CEO Anthony Wood leading the effort.

At the urging of Netflix's CEO Reed Hastings, the streaming platform project was spun off into a separate company — one that became Roku. Last year, Hastings told CNBC that the company "didn't think Roku had much of a chance" when compared to game consoles and the Apple TV.

The spin-off left Netflix with 15% equity in Roku and gave Wood patents and more than two dozen Netflix employees. Netflix sold its investment stake in Roku in 2009.

Both companies were in very different positions in 2009. Netflix was still focused on its DVD-by-mail service, while growing out its streaming product. Roku sold chunky streaming boxes for $100 that converted basic TVs into smart ones — one of the first devices to do so that wasn't also a DVR or game console.

Now, Netflix is all-in on streaming, with the company eyeing an ad-supported (and, likely, cheaper) version of its service down the road. Roku has shifted focus away from its hardware sales — the company sells streaming boxes for as little as $15 — toward growing its ad-supported streaming service Roku Channel and offering ad inventory on the home screens of its devices.

Some financial analysts say the change in priorities at both companies means an acquisition makes sense: Netflix would be able to get Roku's advertising technology and expertise, and if the company's stock continues to flounder, could do so at an attractive price.

Others are more doubtful anything between Netflix and Roku will happen.

"This is one of the more-absurd things I've ever heard in 27 years following media stocks," Richard Greenfield, a media analyst with Lightshed Partners, said on the CNBC program "Squawk Box" on Tuesday. "Roku is a platform, TV operating system, that is built into devices and dongles...and everybody wants to run on top of that TV operating system...but Netflix actually owning hardware and prioritizing hardware — meaning themselves — over the thousands of devices that Netflix runs on seems antithetical to everything Reed Hastings and Ted Sarandos have built over the years."

Greenfield said analysts who are focused on Netflix's forthcoming advertising-supported tier of service were placing too much value in it as the future of the company.

"Netflix's core business is not advertising, will never be advertising," Greenfield said.