On this episode of Industry Focus: Technology, Dylan Lewis is joined by Fool.com contributor Danny Vena to discuss Roku's (NASDAQ: ROKU) call-out in Amazon.com's (NASDAQ: AMZN) holiday press release and what that could mean for the company's financial results.
A full transcript follows the video.
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This video was recorded on Jan. 12, 2018.
Dylan Lewis: The first company we're going to talk about is a company we've talked about a couple of times on the show before, Roku, and that is the streaming-TV player. They basically sell hardware that allows you to stream and immediately have a streaming operating system on your TV. It takes a dumb TV and makes it a smart TV in a lot of ways. Relevant to Roku, two of the top four best-selling TVs in the U.S. this holiday season were Roku-licensed products, the TCL 32-inch and the TCL 49-inch 4K Ultra HD Roku Smart LED TV. That is a mouthful to say.
Danny Vena: Yeah, that's a mouthful.
Lewis: So, looking at how licensing place in to Roku's business, it's part of the very quickly growing platform segment, which is up 140% year over year, this most recent quarter. While that's gaudy growth, the licensing business doesn't really factor into it all that much. Recent commentary from management basically said, within that platform segment, ad's about two-thirds and content distribution is one-third. And, this is quoting management here, then there's a little bit of licensing from the Roku TV and Roku Powered program. So this is not a big business for them, so don't expect the TV sales to be really doing anything for their top or bottom lines. Where this does factor in, though, is with more people having Roku-enabled devices in their homes, it gives Roku the chance to grow their active accounts. And that's something where they can grow their presence in the streaming space.
Vena: Right. With the advertising growing, that's their fastest growing segments. It will become their largest segment in probably the next several quarters. But it's definitely their fastest growing, and advertising has been kind of a key for them. A lot of folks were wondering with their IPO how they were going to make money selling Roku-branded devices, and it turns out that wasn't there only revenue stream.
Lewis: Yeah. You think about their strategy with hardware and the hardware they personally own, not the licensed hardware, and it's basically, we just want to be in homes, we're going to be very competitively priced, in the low and mid-range of the market. Most of their stuff falls between $30 and $100, so that's very competitive with the low-end streamers like the Chromecast. The idea is very similar with licensing. It's like, "We're not going to make a lot of money on this, but it gets us in the living rooms all over the place, and then we can make our money on this high-margin platform business."
Vena: It seems like everybody wants to get into my living room. I don't understand.
Lewis: It's the battle for your living room. Everyone wants to know what you're watching and listening to, Danny. But to walk some of the enthusiasm back a little bit with the excitement of licensed products for Roku selling particularly well on Amazon, some other TV streamers also sold well. Amazon Fire TV Stick with Alexa Voice Remote was the No. 2 best-selling product across all categories on Amazon, second only to their Echo product that we mentioned earlier. Customers purchased more than twice as many Amazon Fire TV Sticks as compared to last year's holiday season. In talking about Roku several times, one of the things that we've mentioned is, they're competing against some very deep pockets in the tech space. Amazon, Alphabet and Apple all have ambitions in the streaming space. And when you have a platform and offering like Amazon's Prime service, it can be difficult to compete as a smaller player.
Vena: And it's also important to note that all those other companies that you mentioned have ambitions in the streaming space. It's important to mention that they're up against the leader in the streaming space, who already has their name on devices from many manufacturers, and that would be the incumbent Netflix.
Lewis: And Netflix is kind of like, "Put us anywhere, we're somewhat platform-agnostic, we're going to be easy. We just want to collect our $11 a month. We know we put out great content." And frankly, I think that's about a third of the usage for Roku, is Netflix.
Vena: Actually, that's how Roku got its start. Roku was the very first player for Netflix's nascent streaming business about a decade ago.
Lewis: So, looking at whether this is a win or loss for Roku, looking at the data we're seeing from Amazon, the licensing stuff is great. It could be really good for active accounts for them. Amazon's Fire sales also not great for them. I'm going to call this a wash. I think it's about what we expected, nothing too crazy. Competitive risks remain, but not a bad quarter for them looking at their holiday sales.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares), Amazon, Apple, and Netflix. Dylan Lewis owns shares of Alphabet (A shares), Amazon, and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
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