ROKU - Vizio: Riding On The Secular Shift Towards Smart TV

Summary

• Smart TVs are replacing traditional sets.
• VIZIO Holding Corp. provides an integrated solution with multiple revenue streams.
• Despite the sluggish macro environment, VIZIO Holding Corp. should maintain its strong performance.

Overview

VIZIO Holding Corp. ( VZIO ) ("Vizio") has 51% upside. Vizio's SmartCast platform and smart TVs are set to capitalize on the growing demand for connected devices and over-the-top ("OTT") content. By 2030, the global smart TV market is expected to reach $451 billion, with 87% of TVs shipped in North America expected to be smart TVs. Through advertising on its WatchFree and VIZIO Free Channels and partnerships with third-party OTT services, Vizio also has multiple revenue streams and the potential to monetize its large installed base of smart TVs.

Business description

Vizio's innovative platform of advanced smart TVs and powerful SmartCast operating system is shaping the future of television. Users of these smart TVs can easily search for, find, and access a wide variety of content.

Smart TV is the new TV and IoT is becoming a norm

The growing popularity of smart televisions and the evolving tastes of consumers are both positive trends for VZIO.

As a result, smart TVs are quickly becoming the norm in American living rooms. As much as 87% of all TVs shipped in North America will be smart TVs, claims CTA . It is also anticipated that by 2030, the global smart TV market will be worth $451 billion, representing a CAGR of 11% from 2022. The improved functionality of Smart TVs is causing a shift in viewers' viewing habits. As the use of OTT services increases , I have no doubt that the number of Pay TV households will continue to fall. In addition, as people upgrade their TVs and find more value in the biggest screen in the house, I anticipate that the range of uses for Smart TVs will broaden, driving increased adoption.

The traditional model of television advertising, in my opinion, has also been shaken up by the massive movement away from linear TV. Consequently, ad spending, in my opinion, will eventually be directed almost all toward OTT services.

Broadband Internet is another medium that has helped bring the outside world into the home. Due to the widespread availability of high-speed Internet, a variety of services that require a lot of bandwidth can be streamed directly to the Smart TV. Also, IoT (Internet of Things) has allowed for a completely seamless connected home ecosystem. To that end, I believe that this experience will improve as household gain access to faster Internet. Expectedly, Smart TVs will become an essential part of the digital home, as the introduction of new technologies and services enables incremental Smart TV monetization methods.

VZIO products work well together

Getting into the OS was an obvious next step, in my opinion. All VZIO Smart TVs sold in 2019 and later include the SmartCast operating system, creating a seamless combination of hardware and software. By developing both hardware and software, VZIO is able to make products that work well together and improve the customer's overall experience. Even more importantly, the unified entertainment solution provided to consumers by the integrated solution enables VZIO to generate recurring revenue and increase profits, paving the way for the future deployment of competitive Smart TVs by VZIO.

As was previously stated, the disruption of the traditional TV advertising model caused by the consumer shift away from linear television is being addressed by the shift to OTT. Advertising on smart TVs is attractive because it allows companies to reach those who have discontinued their Pay TV subscription and first-time Pay TV subscribers in a more direct and efficient manner. As more Americans abandon analog TV in favor of smart TVs, VZIO is in a prime position to capitalize on this trend. Advertisers can find inventory on VZIO's WatchFree and VIZIO Free Channels, both of which are popular with programmatic and direct advertising buyers. As a result of leveraging data to provide enhanced transparency and targeting options to advertisers, VZIO effectively monetizes its advertising capabilities, thereby enhancing the value proposition it offers.

Vizio's Agnostic Approach

The VZIO platform makes it simple for users to access numerous over-the-top services. VZIO's agnostic approach to content distribution allows it to deliver shows from any network to its subscribers. In addition, VZIO is able to distribute and monetize the apps in a number of ways thanks to its partnership with 3rd party OTT services and its large installed base of Smart TVs in homes. For instance:

1. VZIO receives a cut of the transaction and subscription fees paid by retailers who use the VIZIO Smart TV platform.
2. VZIO's SmartCast home page and the app buttons on its remote controls are prime real estate for advertising.
3. Finally, VZIO's biggest opportunity for making money is through the use of third-party content distributed through WatchFree, VIZIO Free Channels, and certain AVOD platforms. VZIO sells ad space on these platforms to advertisers.

In the end, both content creators and distributors benefit from VZIO's services. I also expect VZIO to find ways to make money off of the growing number of Smart TV-related activities and purchases made by its customers.

Asset-light business model to optimize margins and ROI

VZIO uses a manufacturing outsourcing and asset-light business model to achieve economies of scale and greater operational flexibility. VZIO's manufacturing partners take care of every step of the production process for Smart TVs and sound bars, freeing up the company's time to concentrate on design, and sales and marketing. My opinion is that this business model is highly effective because it maximizes return on investment, cash flow, and working capital. The flexibility to scale up or down in response to demand forecasts is another benefit for VZIO. Even though I think VZIO should bring this capability in-house at some point, the current arrangement suits me fine for the time being.

VZIO should continue to outperform in this weak macro environment

Shipments of televisions were down year-over-year in 3Q22 due to a general industry slowdown, but VZIO increased its share thanks to its aggressive pricing policy. Although I anticipate continued weakness in TV shipments in the fourth quarter and into 2023, VZIO's bottom line should be less affected by this trend now that Platform+ contributes more than 95% of Gross Profit.

Despite a challenging TV market, VZIO's Platform+ business has continued to outperform, suffering far less of an impact from the advertising slowdown than CTV competitors like Roku, Inc. (ROKU). Third-quarter revenue growth for Platform+ was 49%, well above management's projections, and accounted for 29% of total revenue. Most notably, VZIO's projection for Platform+ growth was in line with expectations, coming in at 33%. Especially considering Roku's drastic cut in their forward guidance, I think this is a much better result than investors had anticipated.

Due to its smaller revenue base and less scatter market exposure, I anticipate VZIO's advertising business to continue outperforming in the current macroenvironment.

Forecast

The underlying secular trends for VZIO are positive. However, I believe FY22 is going to be a down year due to continuous slowdown in TV shipments. I also expect VZIO to see muted growth in FY23 due to mix shift effect. That said, VZIO should gradually improve margins back as Platform+ segment continues to grow profitably.

VZIO is currently trading at 14 times forward EBITDA. I believe VZIO should be able to sustain its valuation as it sees growth recovery in FY24. With these assumptions, I believe VZIO is worth around $10.81, or 51% more. Note that VZIO was trading at $10 just 8 weeks ago, so this price target is not a far-fetched idea.

Key risks

Smaller scale

SmartCast isn't as large as its rivals, and the gap between them in terms of active accounts is only going to widen over time. Even though I think the market is big enough for several players, I can see how being a minor player would make it harder to negotiate favorable advertising rates with potential clients.

Volatility in ad spend

Profiting from the SmartCast platform is in its early stages and fraught with difficulty. SmartCast is VZIO's main source of income, and if advertisers significantly cut back on spending in this climate, that could hurt the company's bottom line.

Conclusion

Vizio's smart TVs and SmartCast operating system are well positioned to benefit from the growing popularity of smart TVs and the shift towards OTT content. With 87% of TVs shipped in North America expected to be smart TVs and the global smart TV market projected to be worth $451 billion by 2030, there is strong demand for the improved functionality and expanded content offerings of smart TVs. As the use of OTT services increases and traditional TV advertising shifts towards OTT, Vizio Holding Corp. is well positioned to capitalize on these trends.

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