What happened

Shares of Vizio Holding Corp. (VZIO 0.38%) took off like a rocket on Thursday, up by 14.3% as of 11:15 a.m. ET, after the smart TV maker exceeded earnings expectations last night.

Analysts had forecast that Vizio would end Q2 in the red, with an $0.08-per-share loss on sales of $413.2 million. As it turned out, Vizio missed the sales estimate, collecting quarterly revenue of only $408.9 million, but managed to eke out a profit of $0.01 per share.  

So what

Was this news good enough to justify a 14% run-up in share price? Although total sales rose only 2% year over year in Q2, on a more granular level the company's very profitable Platform+ software business grew much faster. Sales there were up 69% year over year, and gross profits increased 47%.  

That sounds like good news, but what these numbers are really telling you is that since profits rose slower than sales, gross profit margin actually declined at Platform+. Indeed, whereas a year ago this division of Vizio was posting a 72.5% gross margin, in Q2 2022 that number contracted 950 basis points to just 63%. Granted, that's still a much better profit margin than what Vizio earned from actually building and selling TV sets. That business only earned a 1.3% gross profit margin in the quarter.

But it's still a decline.

Now what

Long story short, what we seem to have here with Vizio is a company growing TV sales slowly, but software sales quickly. TV profit margins are abysmal, and software margins, while great, are becoming less so.

It's true that Vizio eked out a surprise profit this quarter, mainly by slimming down and cutting its operating costs by 21% year over year. What remains to be seen is how much longer cost-cutting alone can keep this company profitable. Currently still losing money over the past 12 months, and generating negative free cash flow, I fear the situation with Vizio remains too uncertain to call the stock a clear buy.