Roku (ROKU -1.53%) is moving into the smart home space. The company, best known for its eponymous TV services platform, has partnered with Wyze -- maker of connected cameras, video doorbells, and smart light bulbs -- to brand a line of products that will be available exclusively at Walmart.
The Roku-branded smart home products share much of Wyze's design DNA, and they are also similarly priced. However, the pitch from the entertainment company Roku is that the smart home products will also integrate with the Roku smart TV platform -- which could be a boon for consumers. But for investors, there are reasons why this partnership deserves closer scrutiny.
Roku relies heavily on ad revenue, which is waning
Roku has had a mixed year. The company generated revenue of $733.7 million in its fiscal first quarter, beating Wall Street forecasts of $718 million. But the company took in $764.4 million for its second quarter, missing analyst expectations of $805.2 million.
Speaking on the company's second-quarter earnings call, Roku CEO Anthony Wood said a challenging "macroeconomic environment" had led to a drop in spending by TV advertisers. The executive also predicted the marketing industry would be sluggish for a while, which, for a company that makes 88% of its income from ad sales, was a concern for investors. Roku's share price dropped 23% the following day.
A good time to move into the smart home space
Roku's expansion into the smart home space comes at an opportune time. Since 2017, sales of connected appliances have grown steadily in the U.S. of A. This year alone, households are projected to spend $31.4 billion on smart home technology, with that number rising to $48.1 billion by the end of 2026.
Wyze is one of the companies that has garnered consumer attention as people have gotten ever more comfortable with connected devices throughout their homes. The company debuted its WyzeCam indoor camera in 2018 -- a $20 camera that undercut competitors who offered similar products routinely costing more than five times as much. Wyze's founders said they were able to maintain the low price because they were focused on a "high volume, high efficiency, customer-centric and value-driven business model." Over the years since, Wyze has released more than a dozen smart products including fitness trackers and noise-canceling headphones, typically pricing them below rival devices.
The relatively low cost of Wyze products has been scrutinized by many who wonder what corners may be cut to reach such price points. For years, forum users have debated Wyze's security practices and some have raised questions about the company routing user data to servers situated in China and Russia. For its part, Wyze has contended its devices are safe and that it anonymizes user data -- including information handled by third parties.
Wyze received some criticism earlier this year when it was revealed the company had taken almost three years to patch critical vulnerabilities across its camera line. Security researchers notified the company in March 2019 of several flaws, including a bug that could allow a malicious actor to capture footage surreptitiously. However, Wyze did not fully roll out firmware fixes until January 2022, and in that span, the company did not communicate the problems to its users. The following month, Wyze advised users of the original WyzeCam to stop using the camera because one flaw was still unpatched.
Media outlets and security experts lambasted Wyze for its handling of the vulnerabilities. Consumer rights organization Consumer Reports went further, suggesting the company should compensate owners of the first WyzeCam with newer, more secure products. In addition, at least one lawsuit has been filed against Wyze, with the plaintiff claiming the device maker knowingly omitted information about the flaws. The litigant is seeking class-action status.
Risk of future security scandals
For Roku, partnering with Wyze to develop smart home products has some obvious benefits. For starters, the company already has experience in producing and distributing low-cost devices. And unlike other smart home entrants, Roku is effectively bypassing much of the research and development phase, allowing it to go to market much quicker.
There are also some clear risks for Roku -- particularly as it hopes to return to bull-market territory. Should Wyze find itself at the center of another hardware security incident, there may be serious exposure for Roku's brand. As a result, Roku investors should certainly pay attention to Wyze and its security practices moving forward, particularly with both companies' smart home products so closely aligned.