Retail giant Walmart (WMT -0.08%) just announced it will purchase smart TV maker Vizio (NYSE: VZIO) for $2.3 billion. Admittedly, the deal may spook investors in Roku (ROKU -10.29%), which leads the smart TV ads and TV operating system markets, according to market research firm Pixalate. Indeed, Roku stock fell nearly 7% on the day following this announcement.

Vizio should benefit from Walmart's vast resources, allowing it to improve its television and ad platforms. However, Roku has managed to compete against other megacap companies successfully. Does its past success help Roku, or will the synergies of the Walmart-Vizio merger erode its competitive advantage?

Walmart and its competition

Walmart continues to succeed in advertising. Its global ad business grew 28% yearly. Keep in mind that Walmart achieved these ad-sales gains across a deep downturn in the digital advertising market, sparked by the inflation crisis in 2021 and 2022. This success bodes well for the company, as it seeks to compete with Amazon and Google parent Alphabet, and with the Vizio purchase, that competition will extend to the TV market.

Additionally, Walmart has long partnered with Roku, and the affiliation goes beyond providing the OS for Walmart's Onn TVs. In 2022, Roku previously partnered with Walmart to allow consumers to buy Walmart products via a Roku device. Also, Roku and Walmart announced last year that Roku's home monitoring system would be sold exclusively through them.

Furthermore, as recently as Roku's Q4 2023 earnings call on Feb. 15, CEO Anthony Wood said that Roku had a "great relationship" with Walmart. So the deal may indicate some dissatisfaction on the part of Walmart with Roku in the digital ad and e-commerce space.

How Roku could still benefit

Fortunately for Roku, the profit potential in this industry is not found in the equipment but in the advertising. Here, Roku has a clear edge. At the end of last year, Roku's active user base surged to 80 million for the first time. Vizio claimed around 18 million users, but it remains a small fraction of Roku's  active audience.

The one area where Vizio trends in the right direction is average revenue per user (ARPU). Its ARPU of $31.55 grew 14% yearly in the most recent quarterly report. While Roku's ARPU of $39.92 is higher, it dropped 4% year over year.

Still, investors should look at other companies offering TV operating systems as a guide. Despite much larger sizes, Amazon and Alphabet have not succeeded at unseating Roku as the largest provider. Even with Vizio's success, Walmart could also struggle in this area. Walmart's deep pockets and massive distribution system can make a difference, but they don't guarantee the retail titan's success.

Additionally, Roku and Vizio have attracted their customer base partially by serving as a neutral arbiter between content providers and ad-buying companies. Now, with Vizio and Walmart becoming one and the same, one has to question whether Vizio can maintain such neutrality. The potential for Vizio's ad platform to develop some bias toward Walmart could send advertisers to Roku and other platforms instead.

Does the Walmart-Vizio merger hurt Roku?

Admittedly, having Walmart join the ranks of streaming service stocks through Vizio probably hurts Roku to some degree at first. As a result, Vizio will become a more powerful competitor, and the state of the Roku-Walmart partnership is now in some doubt, Anthony Wood's reassuring comments notwithstanding.

Nonetheless, Roku has long led in market share amid other large competitors. Also, like Amazon, Walmart will become another non-neutral competitor in the space, a factor that could work in Roku's favor.

For these reasons, investors should consider buying the pullback in Roku stock.