Roku may benefit the most from Walmart's Vizio acquisition

Recently, Walmart (WMT) announced a $2.3 billion deal to purchase TV maker Vizio (VZIO) as a way to expand its digital advertising business. In response, shares of competitor Roku (ROKU) have begun to trade lower this week.

Needham & Co. Senior Media & Internet Analyst Laura Martin joins Yahoo Finance to give insight into why she believes this is an overreaction and, in fact, the deal is a positive for Roku.

Martin elaborates on the possible benefits for Roku with this deal: "The big competitors here are Samsung (005930.KS), LG, Vizio — which will now be gone — and Roku, and they're all owned by these huge conglomerates other than Roku, which is owned by a single founder. Really fast pivot times, really fast product upgrade times because there's one guy that can make a decision. That used to be true of Vizio. Now, being owned by Walmart, we would guess that decisions and changes and market reactions are a little bit slower because Walmart's processes are probably a little more refined than these founder-led companies like Roku and Vizio. So, I think that's good for Roku..."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

[AUDIO LOGO]

BRAD SMITH: Roku shares down nearly 7% in the last two days since Walmart announced its acquisition of Vizio. But our next guest says that this share price reaction may be overdone.

Laura Martin, Needham & Co senior media and internet analyst joins us now. Laura, great to see you here this morning. And Thanks so much for taking the time. I mean, really fascinating rundown. You pointed to 10 potential upside value drivers from this deal. We won't run through all 10 right now. But one of the huge things you pointed to with Roku here, it really goes back to how they're going to be able to drive some of that advertising revenue here. Take us through part of that thesis here

LAURA MARTIN: Right. So my thesis here is that when Walmart is reacting to Amazon, Amazon introduced ads to all of its 200 million Amazon Prime Video subscribers. And now it's going to take connected television ads on a big screen and connect them all the way down to the purchase on e-commerce platform.

Walmart has now bought Vizio because Vizio has $500 million of ad sales on connected televisions. And it's going to use Vizio to keep up with Amazon. You'll buy an ad on a Vizio TV, and then Walmart will tell you whether any consumer bought that product in the real world in one of their 4,700 stores or on their e-commerce platform called walmart.com.

That means who they're targeting for ads is totally different than the past-- of the vizio's past because Vizio used to be a direct competitor to Roku. And now, Walmart is going to use it to do a totally different thing, which is tie ads to purchases, which competes with Amazon more directly. So that's a positive for Roku because it sort of leaves it as a monopolist in the marketplace for advertising.

SEANA SMITH: So, Laura, what does that then tell us about the potential gains here for Roku within that market in terms of market share and what that could potentially do for their revenue then in the longer term, given the fact, if you're right here that Vizio won't be as strong of a competitor?

LAURA MARTIN: Right. So I mean Vizio is going to do $500 million of revenue, so that's a pretty, like, let's say it all moved to Roku-- that would add about 30% to their ad revenue just the Vizio piece, not to mention what they're already growing on their own platform. So that would be a big upside driver, I would say.

BRAD SMITH: Additionally, here, you talk about the OTT focus and the pros and cons of single focus companies. I mean, when we think about some of the competition within this landscape, there's been significant OTT consolidation that we've seen. How does Roku kind of fit into that or how do they kind of retain their own market share within that?

LAURA MARTIN: Right. So the big competitors here are like Samsung, LG, Vizio, which will now be gone. And Roku, and they're all owned by these huge conglomerates other than Roku, which is owned by a single founder-- really fast pivot times, really fast product upgrade times because there's one guy that can make a decision that used to be true of Vizio. Now being owned by Walmart, we would guess that decisions and changes and market reactions are a little bit slower because Walmart's processes are probably a little more refined than these founder-led companies like Roku and Vizio.

So I think that's good for Roku because it's the only one that only focuses on streaming. And it's an arms dealer, meaning it takes 20% of the revenue generated on the Roku platform, from Netflix, from Peacock, from Disney. It doesn't care who wins the streaming wars because it takes 20% of their revenue sort of no matter what, no matter who wins or loses.