When Roku Inc. (ROKU 0.68%) released its first-ever quarterly results as a publicly traded company last month, shares skyrocketed more than 50% in a single day -- and investors rightly rejoiced. After all, Roku trounced Wall Street's expectations on both the top and bottom lines, led by what management described as the "rapid adoption" of its advertising, audience development, and content-distribution services. While its player sales climbed a modest 3.8%, to $67.3 million, platform-segment revenue jumped 137%, to $57.5 million.
The deal that changes everything
More specifically, two weeks ago, Disney announced it had agreed to acquire most of Fox's assets in a mammoth all-stock deal worth roughly $52.4 billion. As part of the agreement, Fox will spin off its Fox Broadcasting network and stations -- including Fox News, Fox Business, the Big Ten Network, and its FS1 and FS2 sports stations -- into a newly listed company.
Then, assuming Disney closes on its end by the middle of 2018, as planned, the House of Mouse will be the proud new owner of the Twentieth Century Fox Film and Television Studios, and Fox's remaining cable and international TV businesses. That includes the rights to properties like Avatar, X-Men, Fantastic Four, and Deadpool, regional sports networks, National Geographic, a 39% stake in European satellite provider Sky, Star in India, and a controlling stake in video-streaming site Hulu.
Investors should keep in mind that Disney already owns not only its namesake film studios, TV channels, and parks and resorts, but also Pixar, Marvel Entertainment, Lucasfilm, ABC, an 80% stake in ESPN, and 50% of A&E Networks.
The Fox side of the equation
How does this industry-shaping deal benefit Roku?
First, after Fox spins off its selected assets, it will be positioned primarily as a play on the live news and sports industries. But Fox also opted to maintain its ownership stake in Roku, which amounted to roughly 7% of the total company prior to Roku's initial public offering in September. To be clear, that stake was likely diluted in the initial public offering (IPO), but it's still a notable vote of confidence.
It also shouldn't be a complete surprise. When asked in an interview with TheStreet last month whether traditional TV players have underestimated the shift in ad spending to streaming services, Roku CEO Anthony Wood replied: "Yes -- not all of them. Fox's leaders I think understand, but many of them don't."
In short, Fox should serve as an able partner and investor in Roku's longer-term success.
A boost from Disney
Second, earlier this year, Disney investors cheered as the company unveiled plans to roll out two streaming services -- an ESPN-branded multi-sport video service in 2018, followed by a Disney- and Pixar-branded streaming service in the second half of 2019. Disney CEO Bob Iger called it "an entirely new growth strategy for the company, one that takes advantage of the incredible opportunity that changing technology provides us to leverage the strength of our great brands."
That was all well and good at the time, as Disney was prepared to gradually grow its services through its controlling stake in direct-to-consumer streaming tech company BAMTech. But these newly acquired assets from Fox should provide Disney the more immediate scale it needs to effectively challenge streaming media stalwarts like Netflix and Amazon Instant Video -- both from a content perspective and through the supplemental technical capabilities of Hulu.
It stands to reason, then, that adding multiple prominent new streaming services from Disney should only accelerate the shift of advertising dollars and viewership to platforms like the ones Roku provides. Roku will not only benefit from advertising and marketing spending on those services, but should also receive a slice of subscriber revenue if viewers use its platform to sign up.
The bottom line
That's not to say Roku is a guaranteed winner for investors today. After Roku's post-IPO pop in September and its most recent earnings report last month, the company's stock has already nearly quadrupled from its $14-per-share IPO price. But given Roku's status as a key beneficiary of the industry shift to streaming media, and in light of the positive consequences of the Disney-Fox deal, it's also hard to blame the market for its enthusiasm.
At the very least, I think opportunistic investors would do well to add Roku to their watch lists.