Tuesday was a challenging day for investors, but it was particularly rough for Roku (ROKU -10.29%) shareholders. The stock was trading lower by as much as 11% before closing with a nearly 9% decline. There was no Roku-specific news to account for the streaming video pioneer's slide. It doesn't report fresh financials until Thursday afternoon.
Shares of Roku tumbled after The Wall Street Journal reported that Walmart (WMT -0.08%) is in talks to acquire TV manufacturer Vizio (VZIO -0.09%) in a $2 billion deal. The potential pairing would be more about Vizio's growing smart-TV operating system platform than its meandering hardware business, placing market share leader Roku in the crosshairs.
Scary stuff? Not really. Let's go over some of the reasons why this shouldn't matter.
1. Vizio is a fringe platform player
Most TV makers have partnered with Roku or other third-party platform operators for built-in solutions to transform their televisions into smart TVs out of the box, but Vizio has taken a more ambitious path. Its product rolls into your living room with its own proprietary operating system. There are now 17.9 million active Vizio SmartCast accounts, a figure that is growing while its TV sales have fallen over the past year.
Vizio has seen its SmartCast audience grow by 8% from where it was a year ago. It's moving in the right direction, but the gap is widening for the market leader. Roku has grown its audience by 16% in that time to 75.8 million users. It's not the only metric where Vizio is fading in Roku's rearview mirror.
The average SmartCast viewer is spending 3.2 hours a day streaming through the platform. Roku is at 3.8 hours a day. Vizio's average revenue per user (ARPU) over the trailing 12 months is $31.55, also well short of Roku at $41.03.
It's easy to see why a penny-pinching Walmart would be eyeing Vizio and its $1.6 billion enterprise value, rather than Roku with its $11.5 billion price tag. It's also easy to see why it can be gobbled up without much of a premium. Vizio stock was trading lower over the past year before leaping on the Walmart story. Roku stock has more than doubled since the start of last year.
Image source: Getty Images.
2. You've seen this before
If a streaming leader taking a hit because Walmart is buying a small rival sounds familiar you have a pretty good memory. Find me in a time capsule as a Netflix shareholder in 2010 when Walmart acquired premium streaming service Vudu.
Walmart had some initial success with Vudu, but it was no match for a leader with momentum. Netflix would go on to deliver wealth-altering gains for us shareholders. Walmart would dump Vudu on Fandango a decade later.
This particular deal could be even more problematic because of the devices angle. Walmart already sells its own private-label TV under its Onn brand, but that doesn't stop other manufacturers from selling their hardware through the country's largest retailer. Will that change if Walmart owns a competitor outright? How badly would Onn sales suffer if Walmart decides to replace Roku as the built-in operating system? This would be bad news for Roku, sure, but who would buy a TV from Walmart if they all came in one unpopular platform flavor?
3. Roku has seen bigger
If you think Walmart going from friend to foe is a problem for Roku have you checked out its current competition? Roku is facing off against Apple, Alphabet, and Amazon. It's been competing against Apple TV, Google Chromecast, and Fire TV for years. It's doing pretty well.
Roku commands double the U.S. market share of its closest rival. It's the top dog in Canada and Mexico, too. I don't think Roku shareholders need to lose any sleep if Walmart is dreaming of a way to sell more ads. It's already fighting and winning against the titans of consumer-facing tech.
Roku remains the leading streaming service stock in a growing space. If Walmart is eyeing a small rival generating less than a fifth of the platform revenue of Roku, bring it. History has been kind to the market leaders, and Tuesday's sell-off could be an opportunity to pick up Roku at a discount ahead of a potentially promising financial update later this week.
