year (year 4.27%) Want more control over the biggest screen in your home.
After years of licensing its operating system and offering reference designs to manufacturers, Roku is coming up with its own television set. The streaming company recently unveiled a new line of TVs that will be available later this year.
There are several reasons for Roku’s departure from a strategy of purely partnering with manufacturers to becoming a competitor in its own right. Here are three things investors should know.
1. Reduce price competition
Roku can sell its televisions at breakeven prices to capture market share.
Roku earned $44.25 per account from its platform business over the past 12 months. comparatively, Vizio (VJIO 0.27%) At the same time only $27.69 was generated per account. Other big manufacturers like Samsung and LG Electronics don’t break out their platform revenue.
With a significantly higher monetization rate, Roku can undercut the competition, offering consumers a better TV or a lower price. And it seems to be going after a large part of the market. Its 11 models range from 24-inch panels to 75 inches. Prices start at just $119 and go up to $999 at the high end It doesn’t appear that Roku is going after the very high end, where consumers may be less price sensitive.
Roku is already the most popular smart TV operating system, but Samsung and Vizio are still the top manufacturers. Offering consumers a better value could help knock them off their top spot and help Roku take more market share.
2. Advance television innovation
“Roku-branded TVs will bring more innovation around the TV experience,” the company said in a press release announcing the new TV set.
By taking control over the manufacturing and pricing of the devices, Roku doesn’t have to push manufacturing partners to include new features or designs in their products. Roku hasn’t always been able to include what manufacturers want in their smart TVs, voice remote being one of them. With full control, Roku can simply release the new design into the wild and see how customers respond.
Importantly, the company will keep any new designs and innovations open to use by its manufacturing partners. Ideally, Roku can show how much consumers value features with TV sets and convince manufacturing partners to include them as well.
Any new features on Roku’s TVs will likely benefit its platform business in some way. They can improve discovery, increase engagement, or offer direct monetization methods through advertising or subscription sales. And if they’re a hit with consumers, it could benefit the entire Roku TV ecosystem, increasing appeal to manufacturing partners.
3. A revenue increase
Roku disappointed investors when it said it expected revenue to decline in the fourth quarter. More expensive hardware sales could give a boost to its top line in 2023.
Roku’s devices typically sell for less than $100, so introducing a line of TVs with an average selling price above $100 could move the needle on revenue.
While Roku’s player segment generated just $269 million in device sales in the first three quarters of 2022, Vizio sold $988 million in TVs and devices during the same period. Roku’s total revenue for the first nine months of the year topped $2 billion, so if it can get close to Vizio’s sales levels, for example, that could mean a big revenue boost for the TV company.
Smart investors know that Roku’s profits come almost entirely from the platform side of the business. And as mentioned above, Roku TVs will be priced to sell, not for a significant profit. Vizio took that path, generating a gross profit margin of just 1.3% on its devices in the first three quarters of 2022.
Should you buy Roku stock?
While Roku faces some short-term headwinds, the move to sell its own TVs holds a lot of potential.
Importantly, risk is fairly low and highly asymmetric. The downside of its failed attempt is a short write-up, but the upside is strong adoption and continued market share gains in the smart-TV space. If the program allows Roku to roll out new features that provide value to consumers and the Roku platform, it could be a home run.
Regardless, Roku ranks as the most popular connected-TV platform as more and more content and ad spending moves into streaming, which is an enviable position. With the stock trading at an all-time high of 90% discount, the shares look attractive.