What happened
Shares of connected-TV platform Roku (ROKU -4.03%) suddenly popped in early trading on Tuesday morning after the company announced a new integration with e-commerce company Shopify (SHOP -5.07%). As of 12:30 p.m. ET, Roku stock was up 12%. For its part, Shopify stock was little changed with a less than 2% gain, suggesting the news is a bigger deal for Roku than for Shopify.
So what
As of the first quarter of 2023, Roku had 71.6 million active accounts on its platform, and these users will now start seeing some interesting advertisements from merchants that use Shopify. Roku and Shopify are integrating to allow more-immersive advertisements; viewers can use their Roku remotes to purchase products directly from the ads.
This isn't the first instance of what are called Roku Action Ads. Last year, the company announced a similar integration with Walmart.
But partnering with Shopify is an interesting development. Millions of merchants use Shopify, allowing it to capture around 10% of all e-commerce activity in the U.S.
Therefore, the new partnership could really grow Roku's advertising opportunity.
Now what
In the first quarter, 86% of Roku's revenue was platform revenue, which is mostly generated from ads. So potentially increasing its advertising revenue by partnering with Shopify is an exciting prospect.
That said, I believe it's fair to wonder if consumers really want to digress from what they're watching to click and purchase something from an ad, even if the process is frictionless. In the official press release, one Shopify merchant said, "We're thrilled to start experimenting with Roku Action Ads." And I think that's the best way to think about this: as an experiment.
If Shopify merchants see higher sales conversions and get better consumer insights, then it's likely they'll lean into Roku Action Ads more. But they probably won't increase their emphasis on those ads if it's not really working.
Today's news is a partnership with no downside for Roku and potentially high upside if it goes well. But as with most things in investing, investors will have to patiently wait to fully see the financial benefit.
