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VIZIO is a leading affordable Smart TV and soundbar manufacturer in the US that went public through an IPO on 25 Mar 2021
It has expanded into the streaming platform segment through its Platform+ service
Platform+ revenue, comprising of SmartCast (proprietary operating system) and Inscape (ACR provider), has high margins and grew by 132.9% in FY20
Headline figures conceal rapid Platform+ growth
Expansion of Platform+ will improve business fundamentals
DCF-based fair value estimate of US$22.70, representing a possible downside of 5.4%
VIZIO is a leading affordable Smart TV and soundbar manufacturer in the US that aims to be the centre of the home portal through the integration of its Platform+ services.
VIZIO sells its own brand of devices and layers on its Platform+ services – SmartCast and Inscape, onto its Smart TVs to generate additional revenue.
SmartCast, its pre-installed proprietary operating system, supports many leading streaming apps (i.e. Disney+) and provides broad support for third-party voice platforms (i.e. Amazon Alexa). While Inscape, a free opt-in service, uses Automatic Content Recognition (ACR) technology to collect viewing behaviour data which helps to generate more personalised content and ads for users.
Its Platform+ service has 3 main monetisation streams - Advertising, Data licensing, and Content distribution, transactions and promotion, out of which, advertising accounts for the largest proportion of revenue.
The combination of Device and Platform+ has created a flywheel effect as growth in Smart TV sales propels SmartCast adoption that drives engagement and monetisation which flows back into creating higher quality/cost-effective Smart TVs and the cycle continues.
Given that Platform+ is a relatively new segment, it commands a significantly smaller share (7.2%) of total FY20 revenue compared to Device (92.8%). However, Platform+ revenue has expanded rapidly at a CAGR of 101.2% from FY18 to FY20 and management expects it to continue outpacing Device's revenue growth.
VIZIO is led by its founder, Mr William Wang, and a management team who have on average at least 10 years of experience in the television/entertainment/advertising industry, which will be critical in aiding the expansion of Platform+ that is still in the early stages of growth.
I like that the founder has constantly focused on improvement and grasps the importance of expanding into the platform segment as noted in VIZIO's S-1 and has stuck to its founding principle of “Where Vision Meets Value” as seen from its track record of quality yet affordable devices.
1. Total Revenue
VIZIO’s overall revenue grew 14.7% from FY18 to FY20 primarily due to a surge in FY20 revenue as stay-at-home restrictions fueled demand for Smart TVs and soundbars which caused Device revenue to spike 6.9% YoY. This led to increased SmartCast adoption which combined with rising average revenue per user (ARPU), increased Platform+ revenue by 132.9% YoY, pulling total FY20 revenue higher.
2. Gross Margin
VIZIO’s overall gross margin grew 8.3% pts from FY18 to FY20 mainly on Platform+'s revenue proportion more than tripling to 7.2% that also benefited Platform+ margins as return to scale kicked in.
The sharp uptick in FY20 gross margin was further propped up by a temporary suspension of device discounts due to pandemic-fueled device demand that caused Device gross margin to climb 2.7% pts. However, management cautioned that the increase in Device gross margin is unsustainable and will return to normalised levels in the future.
The expansion in top-line and overall gross margin helped VIZIO turn NPAT positive in FY19 and improved NPAT by 343.9% in FY20.
Its current ratio stood at 1.10 as of 31 Dec 2020, representing a healthy short-term liquidity position. It is in a net cash position of US$199.7 mil in part due to its asset-light operating model as it outsources manufacturing. In addition, its negative net working capital enables it to internally finance growth as its cash increases with scale.
1. Expanding Platform+ improves VIZIO's fundamentals
The expansion of Platform+ has 2 main benefits - grows recurring revenue and increases gross margins.
a) Grows recurring revenue
SmartCast active accounts automatically generate revenue once they log on to the SmartCast platform as monetisation streams such as advertising start kicking in. Given that the average TV replacement cycle is about 10 years, the runway of recurring revenue for SmartCast active accounts is extremely long and thus, the increasing scale of SmartCast grows recurring revenue. This is particularly important for VIZIO as it partially offsets any cyclicality in the Smart TV industry.
b) Increases gross margins
I expect that Platform+ will continue growing its gross margin over the long term for 2 factors.
Firstly, the more data Inscape collects, the more targeted its advertisements will be. This could potentially attract more advertisers to Platform+ who may bid up ad rates.
Secondly, as SmartCast gains scale and drives engagement, it will attract more advertisers to the platform, potentially driving up ad rates in the same way Roku, an established streaming platform, is doing.
As seen from the chart above, VIZIO's Platform+ TTM 4Q20 ARPU is 54.8% lower than that of Roku. From my research, VIZIO and Roku's software platform have no key differentiators in user experience. Thus, I believe that Roku's higher ARPU is primarily due to its larger advertiser base as a result of its scale which gives it pricing power over its advertising inventory that is estimated to be on the high-end at US$30.0 per 1,000 impressions.
The revenue runway for Platform+ could be further lengthened as the U.S. Connected TV (CTV) advertising revenue is expected to increase by 186.6% from 2019 to 2024 as advertisers shift spend away from Linear TV which is declining in viewership. This is supported by Roku's top 6 advertisers committing to increase their ad spend in FY21 after doubling it in FY20, indicating that VIZIO's advertising revenue could continue growing quickly in FY21.
Thus, as the marginal cost of adding new ads onto SmartCast is relatively low, improvement in advertising revenue will drive higher Platform+ gross margins.
2. Rise of the Smart TV as the centre of the home portal
Since its inception, the Smart TV's use cases have been growing and were particularly apparent during the pandemic as all activities had to be done at home. This was reflected in the 34.0% QoQ increase of SmartCast Hours (aggregate amount of time viewers engage with the SmartCast platform to stream content or access other applications) in 2Q20 as more users revolved their lives around the Smart TV.
I believe the rise of the Smart TV will drive 2 main benefits - increasing Smart TV shipments and an increase in SmartCast Hours per SmartCast active account.
a) Increasing Smart TV shipments
VIZIO's Smart TV shipments have increased by about 61.4% from FY18 to FY20 as new use cases for the Smart TV were developed and previous TV types reached the end of their life cycle (i.e. 1080P Smart TVs swapped for 4K Smart TVs).
I expect this trend to continue as the connected home experience becomes more seamless through 5G and Wi-Fi 6 lowering latency and thus, driving adoption of connected home appliances (i.e. Amazon Alexa) which increases the need for Smart TVs. This is supported by a study by Grand View Research which forecasts the US Smart TV industry will grow at a CAGR of 9.5% from 2017-2025.
It is important to note that this will drive Device revenue and Platform+ as about 65.0% of Smart TV shipments are converted into SmartCast active accounts.
b) Increase in SmartCast Hours per SmartCast active account
The average SmartCast Hours per active account increased by about 54.0% in FY20 as stay-at-home restrictions lifted overall screen time and the time spent on SmartCast TVs through the SmartCast platform grew by 10.0% pts YoY in 4Q20.
I expect SmartCast Hours per active account to remain largely resilient post-pandemic as 44.0% of the US workforce is expected to remain working remotely based on a Statista poll and I believe SmartCast as an input option will continue taking away share from Linear TV as CTV's capabilities increase and more streaming content becomes available.
Thus, as the total active accounts rise, VIZIO's available advertising inventory should grow as well, and based on the above statistics of growing CTV ad spend, I expect VIZIO's advertising revenue to increase.
I project overall revenue growth to taper off in FY21 and FY22 as both Device and Platform+ growth had been brought forward by the pandemic in FY20. However, I expect growth to accelerate in FY23 as device unit shipments increase after easing off in FY21 and FY22.
From FY21 through FY25, I forecast Platform+ ARPU to grow with a declining factor of 45.0%, giving an FY25 ARPU of US$28.78, largely equal to Roku's TTM 4Q20 ARPU of US$28.76 while SmartCast active accounts grow with a declining factor of 40.0%, giving an FY25 figure of 25.9 mil, which is 50.6% of that of Roku's FY20 figure.
Moving down the income statement to margins, I forecast that overall gross margin growth will slow in FY21 as Device gross margin returns to the normalised figure based on management's comments and Platform+ gross margin stabilises. However, I estimate that overall gross margin growth will pick up in FY22 as the gross profit proportion of high-margin Platform+ continues to grow.
With the above key assumptions, I derived a fair value/share of US$22.70 using a back-of-the-envelope Discounted Cash Flow (DCF) Model with the Gordon Growth Method. This represents a possible downside of 5.4% from the last closing price of US$24.00.
WACC of 10.0%
Terminal Growth Rate of 2.5%, which is the average of US GDP growth from 2017 to 2019
I chose a WACC of 10.0% to err on the side of conservatism as Platform+ is still in the early stages of growth but if you were to adopt a more aggressive WACC and terminal growth rate, there could be significant potential upside.
At VIZIO's current share price of US$24.00, it trades at 15.8x FY22E EV/EBITDA and 10.1x FY22E EV/Gross Profit which seems fair for its growth profile and competitive industry structure (elaborated under risks) but is still much lower than Roku which trades at 27.8x FY22E EV/Gross Profit.
I opine that Roku deserves a higher multiple than VIZIO as it has a significantly larger scale and higher gross margins (Roku's FY22E gross margin is 48.8% compared to VIZIO's 20.2%) but it is up for debate on how wide the EV/Gross Profit multiple gap should be. In my opinion, it is difficult to make an accurate judgement given the lack of true comparables but it is possible the market re-rates VIZIO to a multiple closer to that of Roku if it gets hold of the streaming narrative and uncovers that the headline figures conceal rapid Platform+ growth.
1. Increased competition in the Smart TV industry could drive down unit prices
The competition within the Smart TV industry is intense with new entrants (i.e. Walmart rolling out its Smart TV brand) and high price sensitivity as a result of the wide variety of similar quality Smart TVs. This has seen VIZIO’s share of the US Smart TV market decline by 11.0% pts from 2017 to 2020 and creates the risk of compression of future gross margins should it be unable to decrease costs sufficiently to combat price declines.
I am concerned by this as Smart TV sales are the biggest driver of SmartCast’s adoption and thus, further losses in market share could affect Platform+ revenue growth. In addition, Device gross margins are already thin, thus, management must control costs tightly if it wants to prevent compression.
However, it is meaningful to note that Roku adopts a strategy of operating its Device segment at a gross margin near zero to increase Device sales which drive platform account growth. It remains to be seen if VIZIO will take a similar route and leverage the consumer's price sensitivity to drive Platform+ growth.
2. High Revenue Concentration
VIZIO's 4 largest retailers, measured by net revenue, accounted for approximately 84.0%, 87.0% and 85.0% for FY18, 19 and 20 respectively. (S-1, pg 39) This high revenue concentration creates the risk of significant revenue drop-off if a retailer decides to stop carrying VIZIO's products.
In addition, Walmart which accounted for more than 10.0% of Device net revenue from FY18 to FY20, rolled out its own Smart TV brand in 2019, which could incentivise it to promote its TV brand over VIZIO's and thus, negatively affect VIZIO's TV sales. However, VIZIO's Smart TV shipments have continued to grow in 2019 and 2020 indicating a minimal effect on VIZIO.
3. Lock-up period expires in 180 days post-IPO
On 21 Sep 2021, the lock-up period will expire, opening the option for insiders to sell their stake. If insiders were to heavily dilute their stake upon the end of the lock-up, it could have a negative effect on the share price in the short term. In addition, there could be an overhang on the share price prior to the lock-up expiry on worries of the former happening.
Some of the insiders have already trimmed their stakes during the IPO which could indicate a lower possibility of a flood of selling post-lock-up but even if selling were to occur, it would not alter the intrinsic value of the company.
1. 1Q21 Results Release
When VIZIO releases its 1Q21 results, the key metrics I would look out for would be its TTM ARPU, SmartCast active accounts growth, SmartCast Hours, Platform+ revenue and Platform+ gross margin. If Platform+ continues to show strong growth and VIZIO receives increased sell-side coverage post-earnings, there could be a re-rating of the business to a multiple closer to that of Roku.
Expected Date: April to May 2021
VIZIO is not known as a streaming player which could be partly why it's currently priced at a significant discount to Roku. It remains to be seen how well the expansion of Platform+ will be executed but should it continue rapidly gaining scale, I believe there could be an upside to the current price. In the meantime, I will continue to monitor its Platform+ statistics and US Smart TV market share for indications of its growth.
Thanks for reading,
Disclaimer: I am long VIZIO at an average price of US$21.00. This article is not an investment (buy/hold/sell or otherwise) recommendation, this is only for educational and discussion purposes. This article is not tailored to the specific circumstances of any reader. I/we/The Snowball do/does not purport to be in the business of providing financial advice and the contents of the article should not be regarded as such.
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