As the Fed starts its interest rate cut cycle, many dynamic factors historically come into play. Rate cuts tend to stimulate consumer spending and construction activity since borrowing costs get cheaper. The housing market is expected to see more demand as mortgage rates fall. The IPO calendar gets more crowded. Mergers and acquisitions also grow due to cheaper financing costs. This brings to attention companies that may be potential acquisition targets. Here are three stocks that could be potential acquisition targets in 2025.
Pinterest: The Drama-Free Social Commerce Platform
Rarely are there social media platforms that are mostly free of drama. Pinterest Inc. (NYSE: PINS) is one of them. It deems itself a visual discovery engine that users visit to discover and get inspired and often spend money. Its second-quarter 2024 revenue grew 21% YoY to a record $854 million, and global monthly active users (MAUs) grew 12% YoY to 522 million. Monetization efforts are paying off as advertisers are seeing strong conversions and brand awareness, leading to improved performance. Pinterest continues to gain a share of ad budgets from some of the largest brands in the world. North America experienced a 13% YoY revenue jump. While revenue hit record levels, the 21% YoY growth was actually a slowdown compared to prior quarters.
Pinterest's large user base, particularly with women, its interest in categories including home décor, fashion, lifestyle, and DIY, along with its focus on visual discovery and shopping, aligns with a large e-commerce company or social media platform seeking to add a social commerce element.
Potential Suitors Include META, AMZN
Potential suitors include Meta Platforms Inc. (NASDAQ: META) and Amazon.com Inc. (NASDAQ: AMZN). Amazon is Pinterest’s first third-party advertising partner, which means advertisers on Amazon can also run ads on Pinterest. Shoppable pins with Amazon products enable users to buy products they see on Pinterest directly from Amazon.
Roku: The Video Streaming Infrastructure Play
For many consumers, their first true exposure to streaming video devices was with a Roku Inc. (NASDAQ: ROKU) device, streaming stick or a Roku TV. Roku remains the consumer discretionary sector leader in the streaming device market, with 85.5 million streaming households connected to its network.
Riding the CTV and Ad-Supported Streaming TV Wave
Roku is a key player in the connected TV (CTV) segment, which is experiencing the fastest growth in digital advertising. It makes money from licensing its Roku OS, fees from every premium channel that users access through Roku, advertising fees from its ad-support Roku Channel, home page advertising fees and sales of devices and Roku Smart TVs.
The company just broke through the $1 billion market in its Q3 2024. Most of the money came through platform revenue at $908 million, up 15% YoY. Platform revenue consists of advertising revenues, licensing fees, content distribution fees and subscriptions to premium channels through its devices. Its average revenue per user (ARPU) was $41.10 on a trailing twelve-month (TTM) basis. User engagement continues to grow, with streaming houses growing 5.3 billion hours to 32 billion in Q3.
Potential Suitors include AMZN, AAPL, GOOGL, SNE
Potential suitors include existing streaming device makers and networks or companies looking to expand their footprint in the streaming device market. Amazon could significantly expand its Fire TV ecosystem and take the leading spot in the streaming device market. Apple Inc. (NASDAQ: AAPL) could also expand its Apple TV ecosystem. Google (NASDAQ: GOOGL) could bolster its streaming ecosystem, integrating Roku's capabilities with YouTube, which grew its ad revenues by 12% YoY, and Google TV. Sony Co. (NYSE: SNE) is the last major motion picture studio without a branded streaming network. However, it has stated it wants to remain a content provider rather than a network operator.
Dutch Bros: The Drama-Free Social Commerce Platform
Convenience, affordability and tasty goodness are three reasons customers (repeatedly) flock to Dutch Bros Inc. (NYSE: BROS) drive-thru coffee shops. Unlike Starbucks Co. (NASDAQ: SBUX) customers' major pain point is the long waits during the morning rush, Dutch Bros customers never have to leave their cars to get their drinks unless opting to use the walk-up window.
Dutch Bros is in its hypergrowth stage with double-digit revenue growth surging 30% YoY in Q2 2024. Same shop sales (SSS) rose 4.1% YoY in the quarter. The company is opening 150 to 165 new shops in 2024 with the goal of reaching 4,000 locations in the next 10 to 15 years. Half the shops are franchised, and the company is big on mobile app engagement, as over 65% of its total transactions are made through its Dutch Rewards program. Its average unit volume (AUV) is $2 million, which is impressive when considering the average shop is only 950 square feet.
Potential Suitors include MCD, QSR, SBUX, and LKNCY
Viable suitors for Dutch Bros include fast food chains that want to diversify their beverage offerings to tap directly into the coffee market, like McDonald’s Co. (NYSE: MCD), which has been leveraging its coffee drinks through its McCafé line as sales have grown to 10% to 15% of total revenues. Restaurant Brands International Inc. (NYSE: QSR) could look to double down on its coffee shops by adding another brand on top of its wildly popular Tim Hortons chain.
Chinese coffee chain Luckin Coffee Inc. (OTCMKTS: LKNCY) may be entering the U.S. markets, pricing their drinks cheaply between $2.00 to $3.00, which undercuts Dutch Bros' $3.00 to $4.50 price point. An acquisition would expand their footprint in the U.S. quickly. Incidentally, Dutch Bros is looking to expand into China.
While Starbucks spills more coffee than Dutch Bros sells, it could expand their reach to a younger demographic and expand its drive-thru segment with Dutch Bros. Drive-thru is a sweet spot for its new CEO Brian Niccol as he championed Chipotlane drive-thru lanes when he led Chipotle Mexican Grill Inc. (NYSE: CMG) as its CEO.
