VIZIO (VZIO) Stock: Watching Platform+ To Become Double Plus

Investment Thesis

VIZIO Holding (NYSE:VZIO) has been battered with declining TV sales as a result of significant competitive pressure, leading to steep discounting amidst demand headwinds as a result of challenging macro squeezing consumer wallets. The stock has underperformed its connected TV counterparts Roku (ROKU) and The Trade Desk (TTD) significantly as the street looks increasingly concerned about the ongoing challenges in its Device business and expects continued investments in SmartCast to drive growth. We believe the TV industry may be bottoming with relatively lesser competitive intensity while continued growth in its Platform+ business closing the gap with Roku (on ARPU) underlines management’s focus on connected TV play. We believe the recent decline provides investors a suitable entry point and initiates with a Buy rating with a target price of $9.0 (at 20x Fwd EV/ EBITDA).

Company Background

VIZIO is one of the leading TV brands in the US offering a portfolio of smart TVs across different sizes and picture qualities catering to a wide range of consumers as well as soundbars. Its Platform+ segment operates SmartCast operating system offering an array of streaming apps such as Netflix, Disney Plus, Amazon Prime Video, and Apple TV+ with about 18 mn active subscribers with an average of over 3 hours of viewing time daily.

Beat in Q2

VZIO reported a beat in Q2 2023 with revenues declining 3.5% to $394 mn compared to analyst expectations at ~$380 mn. The revenue beat was driven by a 28% growth in Platform+ revenues to $142 mn ahead of the management’s own guidance of $133-$137 mn with advertising revenues accelerating to 35% YoY (vs 24% growth in Q1) demonstrating its track record of outperformance through several past quarters. It added 80 net new advertisers with returning advertisers increasing spends by 48% YoY with Auto, QSR, CPG, and Pharma being the growth pockets. This was offset by a decline of 15% YoY in device revenues, the 9th straight quarter of decline, with volumes down 11% YoY as a result of demand headwinds and competitive pressure. SmartCast ARPU grew 18% YoY to $30 (significantly closing the gap to ROKU, now ~25% gap vs 55% two years back) with active accounts growing 10% YoY to ~18 mn.

Significant Improvement in ARPU

Platform+ Gross profit came in at $86 mn with a 60.4% margin ahead of management consensus of $78-$83 mn driven by an increase in ARPU and utilization while device gross margin came in at 0.1% reaching its lowest level since it began reporting in 2018. Adj. EBITDA came in at $18 mn (5% margin) ahead of management’s guide of $6-$11 mn driven by a strong beat in Platform+.

Balance sheet position remains strong ending with $321 mn in cash and cash equivalents and negligible debt providing them sufficient flexibility.

Management guided Q3 Platform+ revenues of $153-157 mn; Platform+ Gross profit of $93-96 mn (implying 61% margin) and consolidated Adj. EBITDA of $10-$15 mn, in line with consensus. It highlighted an expected impact of Hollywood strikes in Q3, similar to ROKU commentary, however, despite the impact on the high margin Media & Advertising spend due to the strikes, it expects a sequential acceleration in gross margin, in contrast with Roku. We believe given its increasing strength across other verticals and revenue management strategies as demonstrated by the 35% ad growth in Q2, the bulk of which was driven by other categories.

Valuation

VZIO trades at a steep discount to the connected TV plays across all metrics as a result of ongoing challenges in the device segment. It traded at similar multiples as The Trade Desk, however, the divergence grew significantly in the last few months as a result of the de-rating of VZIO along with an improved operating performance for TTD.

We believe an improving performance in its Platform+ business, pricing inching up within the device segment which could likely be bottoming, and a relative cheap valuation at current levels provide a favorable risk-reward opportunity for long-term investors. Initiate at Buy with a target price of $9.0 (20x Fwd EV/ EBITDA).

Risks to Rating

Risks to rating include:

1) VZIO could lose market share in TV segment which has been facing demand headwinds due to a tough macro backdrop and significant competitive pressure leading to higher promotions since the past few quarters

2) SmartCast is relatively at a smaller scale with 18 mn active users compared to other giants such as Roku and Amazon Fire TV and may need continued investments to drive growth which can squeeze bottom line

3) It relies on third-party manufacturers and may be impacted by capacity issues and manufacturing challenges which is beyond its control

4) Media and ad spend may decline amidst a tough macro backdrop which can lead to a decline in Platform+ revenues which has been the growth contributor

Conclusion

VZIO has taken strides in the right direction over the past two years and has been closing the gap on Roku, driving higher ARPU for its Platform+ business along with diversifying its advertisement customers. With TV prices creeping up, the demand headwinds and competitive pressure may be bottoming and along with continued strong growth in its Platform+ business could lead to a significant re-rating of its business. Post the steep fall of over 35% in the last 6 months and significant multiple contraction, we believe the risk-reward is favorable and provides a better entry point. We ascribe a Buy rating with a target price of $9.0 (at 20x Fwd EV/EBITDA).