Shares of connected-TV platform company Roku (NASDAQ: ROKU) were trending down along with the S&P 500 until about 3 p.m. ET when Roku stock suddenly sank. This market move coincides with a report from The Wall Street Journal that says that retail giant Walmart (NYSE: WMT) wants to buy smart TV maker Vizio (NYSE: VZIO).
As of 3:40 p.m. ET, Roku stock was down 10%. For its part, Vizio stock was up 27%, whereas Walmart stock was relatively unchanged.
Why do Roku investors care?
Vizio’s business is quite similar to Roku’s — they both generate revenue from selling devices, but they also offer an operating system for smart TVs. The operating system business can generate revenue by displaying ads. And it’s this ads business that Walmart is reportedly more interested in.
It makes sense: Walmart has as much consumer-shopping data as any company on the planet. If it can harness this data effectively, it can build a powerful ads business. And that’s what it’s been pursuing in recent years through strategic partnerships.
Roku had 75.8 million active accounts as of the third quarter of 2023. The company needs these accounts streaming content and watching ads. And it needs to grow its base even more. As of right now, Roku has the most shelf space of any smart-home brand at Walmart, which is helpful for making sales and acquiring new users. But the fear is that this will change if Walmart buys Vizio, impairing Roku’s growth.
What now?
Walmart reportedly wants to buy Vizio for $2 billion, which is about what the stock is worth right now. But it’s important to remember that this is an unconfirmed rumor from anonymous sources. Many times these reports prove accurate, but they often fizzle out as well. It’s hard to take action as an investor based on hearsay.
For its part, Roku will report financial results for the fourth quarter of 2023 on Feb. 15. It will be important for investors to watch its progress with active accounts because that’s an important long-term issue.
If Walmart does acquire Vizio, it may take a few quarters for Roku investors to know how big of a competitive threat it ultimately will be.
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Jon Quast has positions in Roku. The Motley Fool has positions in and recommends Roku and Walmart. The Motley Fool has a disclosure policy.
Don’t Blame the Market’s Drop: Here’s Why Roku Stock Suddenly Sank Today was originally published by The Motley Fool
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