Vizio IPO Is A Mix Of Value And Growth Shadowed By Great Risks

  • The smart TV and sound bar vendor, Vizio, has filed for IPO and is expected to go public in 2016.
  • A limited geographic coverage and a unique relationship with main suppliers create a potential for its international expansion.
  • Failing to expand globally will leave investors with modest top-line and bottom-line growth rates.

The consumer electronics company, Vizio, which is mostly known for its high-quality smart TVs, is expected to go public in 2016, thus bringing one of the strongest home-known brands in the U.S. to the public equity markets. Unlike many smart TV vendors like Samsung Electronics (OTC:SSNLF), Sony Corp (NYSE:SNE), Sharp Corporation ADR (OTC:SHCAY), and LG that offer a broad variety of consumer electronics products worldwide, Vizio offers only smart TV and sound bars in the U.S.

This is the reason why even though Vizio controls 35% of the smart TV market in the U.S., with more than 2 million units sold each quarter, it is hardly known outside of the U.S. The limited global presence of Vizio leaves an enormous growth potential for the company that currently grows its top line by 4% every quarter. Going public is the first phase that Vizio takes towards an international expansion that will be funded using the IPO proceeds.

Vizio’s concertation on the American market creates an incredible growth opportunity. However, it is also an enormous operational risk. Vizio will have to increase slowly its manufacturing capacity and create worldwide sales and marketing teams as well as logistics chain to support the global expansion. Moreover, penetrating several global markets require the company to address the particular requirements and consumer preferences in each new country and adjust the offering and prices for the market specifics there.

Global expansion, while addressing to the differences in every local market, is not a simple task which is best presented by the difficulties Uber experiences worldwide. On the other side is the incredible success of Samsung to localize its marketing messages in each market and customize its offering, prices and image to each local market.

Beyond the limited geographic coverage, Vizio’s revenue streams are limited as the company offers only smart TVs and sounds bars. Even though Vizio keeps upgrading, improving and implementing new technologies into its products, it is still a one trick pony that is heavily dependent on its smart TVs sales. As shown in the chart below, Vizio’s net sales and the number televisions sold each quarter are highly correlated with the cyclical trend of the consumer electronics industry. In the past, Vizio tried sometimes to introduce new devices out of its comfort zone, like tablets, smartphones, and PCs, but they all failed in the market, which might indicate Vizio’s inability to compete in segments other than smart TVs and sound bars.

Vizio_chart 2_022116

As I mentioned above, Vizio’s limited geographic coverage presents an incredible opportunity for the company to grow its business internationally. The global expansion could be a tough task for any company and even harder task for a company that has been focused solely on the American market since its inception 14 years ago.

One of the most important factors in a global expansion is to manage inventory and manufacturing capacity wisely so the company could increase or decrease them according to the progress in the field. Two of Vizio’s largest institutional investors AmTran Technologies and Foxconn, with 20% and 8% of the shares, respectively, are also the two major players in Vizio’s supply chain. The unique relationships with two of its biggest suppliers could enable Vizio the needed flexibility when trying to introduce new devices.

Vizio might be unable to successfully launch new devices, but it expanded its revenue streams by offering Inscape Data Service, which is real-time consumer viewing habits data collected by the Vizio platform as shown below. This valuable information could be used by content producers, distributors, advertisers and others to analyze content adoption and consumer preferences. The Inscape Data Service revenue stream is the company’s growth driver that will generate more and more revenues as Vizio sells more TV sets. The potential for such revenues is massive; however, so far the company has not managed to generate substantial revenues from it.

Vizio_chart 4_022116

Looking at Vizio’s financials, one notices that the company has a modest bottom line with less than 3% net profit margin and adjusted EBITDA margin as shown in the chart below. However, Vizio has had a positive bottom line for a very long time, and, in the current instability in the markets when investors are looking for value as well as growth, Vizio could be a good fit.

The company has a small long-term debt of $50M and a large pile of cash of $113M that makes Vizio ready for any large investment or acquisitions if needed. Currently, most of the company’s shares are held by Willian Wang, Vizio’s chairman and CEO. These will be converted into Class B shares which entitle the holder for ten votes for each share it holds. This mechanism locks Mr. Wang’s control in the company and prevents activist intervention in the company’s business.

Vizio_chart 3_022116

Vizio’s entire growth potential depends on the company’s ability to expand globally and successfully to sell Inscape data with minimal legal difficulties. The unique relationship with the major vendors could assist Vizio in its global expansion; however, after 14 years in the market, the investors might wonder why the company hasn't done so before. As the market continues to fluctuate, investors prefer value over growth, and Vizio might have an attractive mix.

However, investors should take into account the risks of failing. Under the current environment, Vizio’s IPO could be an attractive choice. However, the risk associated with it might alert investors. As this is a long-term play, investors should wait to see how Vizio is accepted in the market and how the company plans to expand, globally, before leaping in.

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