Roku (ROKU -10.27%) wants more control over the biggest screen in your house.
After years of licensing its operating system and offering reference designs to manufacturers, Roku's coming out with its own television sets. The streaming company recently unveiled a new line of TVs that will be available later this year.
There are several reasons for Roku's departure in strategy from purely partnering with manufacturers to becoming a competitor in its own right. Here are three investors should know.
1. Undercut the competition on price
Roku can afford to sell its televisions at a breakeven price to capture market share.
Roku generated $44.25 in revenue per account from its platform business over the previous 12 months. By comparison, Vizio (VZIO -0.05%) generated just $27.69 per account in the same period. Other big manufacturers like Samsung and LG Electronics don't break out their platform revenue.
With a significantly higher monetization rate, Roku can afford to undercut the competition, offering consumers a better TV or a lower price. And it appears to be going after a big chunk of the market. Its 11 models span the range from 24-inch panels to 75 inches. Pricing starts at just $119 and goes up to $999 on the high end. It doesn't appear Roku is going after the very high end, where customers may be less price sensitive.
Roku's already the most popular smart TV operating system, but Samsung and Vizio are still the top manufacturers. Offering consumers a better value could help knock them off their top spots and help Roku take even greater market share.
2. Push television innovation forward
In the press release announcing the new TV sets, the company said, "Roku-branded TVs will enable further innovation around the TV experience."
By taking control over the manufacturing and pricing of the devices, Roku won't have to push manufacturing partners to include new features or designs in their products. Roku hasn't always gotten manufacturers to include everything it wants in their smart TVs, the voice remote being one of them. With full control, Roku can simply release the new design into the wild and see how customers respond.
Importantly, the company will keep any new designs and innovations open for its manufacturing partners to use if they want. Ideally, Roku can show how much consumers value the features it's including in the TV sets and convince manufacturing partners to include them as well.
Any new features found in Roku's TVs will likely benefit its platform business in some way. They could improve discovery, increase engagement, or offer a direct monetization method through advertising or subscription sales. And if they're a hit with consumers, it could benefit the entire Roku TV ecosystem, increasing the appeal to manufacturing partners.
3. A revenue boost
Roku disappointed investors when it said it expected a revenue decline in the fourth quarter. More expensive hardware sales could provide a boost to its top line in 2023.
Roku's devices typically sell for less than $100, so introducing a line of TVs with average selling prices well above $100 could move the needle on revenue.
While Roku's player segment generated just $269 million in device sales through the first three quarters of 2022, Vizio sold $988 million of TVs and devices in the same period. Roku's total revenue topped $2 billion through the first nine months of the year, so if it can reach a scale closer to Vizio's level of sales as an example, TVs could provide a major revenue boost for the company.
Smart investors know that Roku's profits almost entirely stem from the platform side of the business, though. And as referenced above, the Roku TVs will be priced to sell, not to make a significant profit. That's the path Vizio has taken, generating a gross profit margin of just 1.3% on its devices in the first three quarters of 2022.
Should you buy Roku stock?
While Roku is experiencing some short-term headwinds, the move to sell its own TVs holds a lot of potential.
Importantly, the risk is fairly low and highly asymmetrical. The downside of its failed efforts is a small writedown, but the upside is strong adoption and continued market share gains in the smart-TV space. If the program allows Roku to roll out new features that provide value to consumers and the Roku platform, it could be a home run.
Regardless, Roku is positioned as the most popular connected-TV platform as more and more content and ad spending moves to streaming, which is an enviable place to be. With the stock trading around 90% off its all-time high, shares look attractive.
