Shares of Roku (ROKU -10.29%) have fallen sharply since the company posted disappointing financial results last month. The streaming video pioneer's stock has fallen in nine of the past 11 trading days, shedding a third of its value in the process.
Analysts have been cooling on Roku following the uninspiring fourth-quarter report. The latest Wall Street downgrade, coming from Steven Cahall at Wells Fargo, didn't even lead with the rough financial performance in lowering his rating on Roku from equal weight to underweight last week. His biggest bone of contention is reassessing Roku's valuation in light of Walmart's (WMT -0.08%) entry into this market after announcing the acquisition of Vizio (VZIO -0.09%).
Audiences matter
Cahall is slashing his price target on Roku from $77 to $51, largely based on Walmart's $2.3 billion deal to acquire Vizio. Until now, Vizio has been a fringe player in the realm of smart-TV operating system platforms. The analyst thinks Walmart's deal places a lower valuation for the connected TV market. I disagree.
Roku commands more than quadruple the audience of active users as Vizio. Roku users also stream more per household, and average revenue per user (ARPU) is 30% higher than Vizio in its present incarnation. Vizio generated $598.2 million in platform revenue in 2023. Roku's nearly $3 billion in platform revenue is five times higher. With Roku's enterprise value at $7.7 billion, it's just 3.3 times what Walmart is shelling out for Vizio.
Sure, Vizio sells a lot of smart TVs. Nearly two-thirds of its revenue comes from selling hardware. Just 14% of Roku's top-line results come from dongles and other devices. This disparity finds Walmart buying Vizio at a revenue multiple that's roughly half of Roku's enterprise value of 2.2 times trailing revenue. But it doesn't matter.
Both companies generated a negative gross profit on their device business in 2023. It's merely a subsidized gateway to get a viewer to the higher-margin platform business. Comparing Roku's selling a $30 HDMI stick to Vizio's moving a $600 smart TV, both at a loss, is comical when you consider that Roku could give its stick away and make up the difference in ad revenue in just nine months. Based on Vizio's ARPU, it would take 20 years to recover the price of a wholly discounted $600 TV.
Image source: Getty Images.
The real TV star
Last week's downgrade was savage. Cahall is slashing his price target on Roku from $77 to $51, a move that would push its enterprise value below $6 billion. Walmart is buying Vizio for less than 4 times its platform revenue, so the market leader in this expanding market is somehow worth 2 times its platform revenue? It doesn't make sense.
What is Walmart going to do with Vizio's money-losing TV manufacturing business? If Walmart keeps it, no other retailer will stock a Vizio TV. Fellow manufacturers will also be hesitant to continue selling through Walmart, given the conflict of interest. Either way, the family tree of future Vizio+ platform users will stem exclusively from Walmart. That tree has a thick root, but how attractive is that going to be for advertisers aiming for viewers with open wallets? I'm a Walmart shopper myself, but if I'm a marketer or a premium streaming service, I'm not backing up the truck on Vizio TV ads.
Roku has faced off against some of the richest consumer tech companies on the planet, and its operating system still reigns supreme among streaming services stocks. Walmart is a quality company, but when it's Roku's recent stock chart serving up "everyday low prices," I see a 10X opportunity in the shares my fellow investors are discarding.
