Roku(NASDAQ: ROKU) stock slipped in February after Walmart announced an agreement to acquire Vizio and its SmartCast TV operating system. The move is widely seen as hurting Roku's ability to grow its connected TV platform over the long term.
Wells Fargo analysts weighed in by downgrading the stock from equal weight to underweight with a $51 near-term price target. The new price target is 21% below the stock's Feb. 26 closing price.
Why Walmart's Vizio deal is bad news for Roku
Roku has dominated the market for connected TV with an estimated 51% device market share in 2023's third quarter, according to Pixalate. But Walmart has been interested in media for a long time, and it believes Vizio's platform will accelerate its growth in the connected TV market. That spells potential market share gains against the industry leader, which explains why Roku stock is falling on the news.
Connected TV platforms make money off advertising, but the weak ad market over the last few years has pressured Roku's revenue and profits and sent the stock down 86% off its previous high.
Management said its video advertising business outperformed the broader ad market in the fourth quarter, and the company's revenue grew 14% year over year. But Walmart's move adds uncertainty to Roku's long-term growth and warrants a lower valuation, according to Wells Fargo's analysts.
Why Wall Street could be wrong
If the bearish view proves to be wrong, Roku will likely come out on top thanks to its growing base of 80 million active accounts. These users are also watching more and more content on the platform. Advertising dollars will ultimately go to where the viewers are, and that gives Roku leverage as competition heats up. Even Walmart may not be able to challenge Roku as easily as Wall Street thinks.
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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Roku and Walmart. The Motley Fool has a disclosure policy.
