Vizio (VZIO -0.28%) made its market debut last week and shares met a tepid response. After pricing at $21, the low end of its range, the stock opened for trading at just $17.50. Shares are still trying to find their footing, but their current price values the smart TV maker at around $4 billion.
By comparison, Roku's (ROKU 1.58%) market cap sits around 10 times that of Vizio's. Here's why Roku stock may still be a steal relative to the newly public Vizio.
Image source: Roku.
Vizio and Roku's main businesses are nearly the same
While both Vizio and Roku are known for their consumer devices -- smart TVs, sound bars, streaming sticks, etc. -- both say their platform businesses hold the most potential for profits and growth.
Anyone that's followed Roku since its IPO knows the results of its platform business are what's driven the stock price. Likewise, Vizio wrote in its S-1 filing with the SEC, "We believe that Platform+ will be the key driver of our future margin growth and financial performance."
So, here's how the two platforms compare as of the end of 2020:
|
Metric |
Vizio |
Roku |
|---|---|---|
|
Active users |
12.2 million |
51.2 million |
|
Net additions (2020) |
4.6 million |
14.3 million |
|
Average revenue per user (2020) |
$12.99 |
$28.76 |
Data sources: Vizio S-1/A and Roku Q4 2020 letter to shareholders.
Vizio's disclosures show Roku has more than four times the number of active users generating over twice as much revenue per year. Combined, Roku exited 2020 with a platform revenue run rate more than nine times that of Vizio's.
What's more, Roku's growing its user base faster than Vizio on an absolute basis. As Roku takes a greater share of the smart TV market -- Vizio's only source of new users -- growth will slow for Vizio. Roku grew its share of smart TVs sold in the United States to 38% last year. While Vizio once had a comparable share of the market, it only accounted for about 13% of smart TV sales last year.
The big reason Roku deserves a premium over Vizio
Vizio actually has a profitable device business, whereas Roku's likely losing money on player sales most years. But device sales growth is extremely slow for Vizio. Amid the pandemic of 2020, which drove a huge rise in home entertainment device sales, Vizio managed to increase its sales just 7%. In 2019, sales grew less than 2%. As Vizio says, the platform business is the key driver of its future financial performance.
That's strongly reflected in each company's stock price. Vizio trades hands around 26 times its 2020 platform revenue. Roku stock trades hands at 31 times its platform revenue. Again, the disparity is actually wider because Vizio's device segment is arguably worth more than Roku's.
But there's a good reason for Roku to fetch a premium. The company's scale is a big competitive advantage. Roku is already one of the most popular connected-TV platforms in the world, and it's still early in its international expansion. In the U.S., it's been the top platform for years now. Not only that, but Roku's user base is highly engaged, with each user averaging over 3.5 hours of streaming per day in the fourth quarter.
That scale gives it the ability to monetize its user base better than Vizio in a few ways. Roku can negotiate better revenue shares with third-party streaming services, either via subscription take rates or ad inventory share. Furthermore, it can invest more in its own ad-supported streaming service and draw more viewers.
On top of that, Roku's scale actually makes its user data more valuable. Roku capitalized on that by acquiring Dataxu and relaunching it as OneView, its own ad-buying platform for inventory on Roku devices, as well as third-party inventory. It also just bought Nielsen's ad technology unit in order to expand to linear television ads.
As mentioned above, Roku's showing great momentum in taking share from Vizio's TV sales. Its player sales are growing significantly faster than Vizio's device sales, and Roku's adding many more active accounts on its platform. So, it deserves a big premium over Vizio. In fact, the premium investors are currently paying for Roku shares versus the smaller IPO stock might be too small.
