Description

Thesis

Vizio (VZIO) is commonly known as a TV manufacturer, but it has been quietly developing a streaming platform comparable in quality and functionality to Roku and Amazon’s FireTV.  The secular shift in viewership and advertising dollars to connected TV streaming has been a powerful tailwind for Vizio’s high-margin platform business (133% and 147% growth in 2020 and Q2 ’21, respectively with 70%+ gross margins) which has reaccelerated its overall growth and transformed its margin profile.   As Vizio’s revenue mix continues to shift from traditional TVs towards its SmartCast streaming platform, we think profitability estimates will need to come up and the stock’s multiple will re-rate higher.  

Platform Inflection

In Vizio, we see a business that was formerly a one-dimensional, unprofitable hardware business, inflecting towards a multidimensional, profitable software business, and we do not believe it is getting requisite credit for the transformation in either its valuation multiple or wall street profitability estimates. While there is nothing sexy about its low growth low margin device business, Vizio continues to sell Smart TVs as a top 3 player in the US market and has done an excellent job converting those sales into active account adds – Vizio is converting net user adds on over 50% of its Smart TV unit sales in 7 of the last 8 quarters, funneling its customers into its highly monetizable SmartCast platform. Once Vizio customers adopt SmartCast, they are not leaving. Remarkably customers spend over 50% of their time on Vizio TVs within the SmartCast platform and less than 10% on OTT devices such as Roku, Amazon Firestick, etc. It’s clear they have a first touch advantage.

With 14M users spending more and more time on the SmartCast platform, Vizio (similar to Roku) now has the scale to monetize its user base in a multitude of ways.  First, as myriad streaming companies desperately compete for eyeballs and subscribers, Vizio reaps the benefits of the enormous amounts of marketing dollars being spent on Home Screen banner ads.  They also generate significant amounts of video advertising revenue by sharing ad inventory with third party AVOD (advertising-based video on demand) services or selling 100% of the ad inventory in Vizio’s own Watch Free TV app, which offers viewers a collection of 270+ channels of content free of charge (comparable to The Roku Channel). Advertisers are flocking to Vizio’s first-party, big screen viewership data as it allows them to sponsor both brand and targeted ad campaigns at significantly higher ROI’s.   Vizio’s platform has a unique advantage as it is more data-driven than traditional TV and increasingly more attractive than other digital platforms, which may rely heavily on data from Apple and others who are now imposing strict limits on user tracking.  Furthermore, VIZIO recently announced a partnership with Verizon Media to support cross-platform advertising solutions – this is key as it allows Vizio to monetize its data both on-platform and off-platform. Vizio is also early in its roll out of new monetization methods, including the ability to participate in third party SVOD subscriptions made through Vizio’s platform as well as a proprietary technology called “Dynamic Ad Insertion,” which expands the scope of its addressable advertising hours to linear television viewed on its TVs.

As they pull on each of these levers, the platform business has grown rapidly from $63M of revenue in 2019 to $65.5M in Q2 ’21 alone; and they’ve already announced $100M+ in contractual upfront advertising commitments for 2022.  As its mix of revenue shifts from TV’s (single-digit GM%) towards Platform (70%+ GM%), Vizio’s total gross margin has expanded from 9% in 2019 to 20% in Q2 2021. While Platform is currently only 16% of revenue, it already makes up 60% of gross margin.  We expect this trend to continue as platform becomes a larger share of revenue, and push EBITDA margins into the double digits. Even without account adds, Vizio is still in the nascent stages of monetizing its valuable platform / data – for context, VZIO's SmartCast hours per active account and ARPU of 256/$16.76 compares to ROKU at 316/$36.46. 

Valuation

We don’t believe this success in platform is yet apparent in Vizio’s valuation. VZIO currently trades at 1.4x EV/Sales and 32.2x and EV/EBITDA by consensus estimates, but 1.4x and 19.5x by our estimates as we believe street profitability estimates are way too low. We expect platform sales will grow at a CAGR of 80% between 2019 and 2023 and total Company adj. EBITDA will grow at a CAGR of 58%.

Applying a 0.5x sales multiple (well below the 1.0x median for a group of consumer electronic names) and an 8.0x sales multiple (at the median for a group of ad platform names / below ROKU’s 11x) to 2022 sales estimates returns a price of ~$27, or ~32% upside from the current price. As Vizio continues to execute on the platform side, we believe investors will start to pay attention and the stock will re-rate.

 Risks/Concerns & Pushback

• Vizio doesn’t have enough scale to have a seat at the table

• It may not be Roku, but content providers and advertisers can’t ignore 14M US households

• Vizio already received $100M+ in commitments at the advertising upfronts for 2022

• While Vizio is a few years behind Roku from a monetization perspective, it possesses an interesting data advantage due to its ability to collect data on anything that happens on its screen, no matter the TV input. To close the data gap Roku acquired Nielsen’s Advanced Video Advertising (AVA) business, which includes Nielsen’s video automatic content recognition (ACR) and dynamic ad insertion (DAI) technologies.

• Account adds are bottle-necked by TV sales that are more expensive to move than a $30 dongle

• We’d argue having the hardware/software integration right on the TV is an advantage validated by Amazon and Comcast recently moving into the TV business

• Vizio has shown there is a first touch advantage in getting users onto its platform instead of using an OTT stick/dongle

• With Amazon and Comcast recently entering the fold with branded TVs, the space is certainly getting crowded and Amazon and Comcast may take market share

• We’d argue the moves serve as validation for Vizio’s business model and prove the importance of software/hardware integration

• Extreme competition is nothing new to Vizio, which has successfully navigated the space for 20+ years as the only US TV manufacturer

• Supported by advantageous shelf placement deals at Walmart and other big box retailers, where most of its sales occur, we think Vizio should be well insulated from any inroads by Amazon

• Amazon and Comcast are currently outsourcing their TV hardware production and offering low cost models - Vizio has many years of customer loyalty and seeks to compete at the higher end with Samsung

• Stock ownership is concentrated amongst insiders and supply partners without much fund sponsorship

• We see this as opportunity – as Vizio continues to execute, we believe you’ll see funds start to latch onto the story and invest

Recent Technical Weakness Weighing on Stock

• Shares unlocked on August 19th

• Vizio’s float is still extremely limited – a lot of this has to do with concentrated ownership amongst insiders and some of its long-time supply partners

• Form 4s show some heavy insider selling by the founder of Gateway, who was one of the initial investors in Vizio over 20 years ago and is cashing out

Catalyst

• Better than expected earnings, particularly with regards to profitability - this is first quarter in which HBO Max is on the platform

• Relief from supply constraints, which is holding down TV inventory/sales

• Ramp in new monetization methods such as on-platform payment capability, which allow them to participate in 3P SVOD revenue shares

• Without success in its new effort to sell its own TVs, we believe Comcast, who has previously indicated interest in acquiring Roku, could come in and purchase the much more easily digested Vizio