Unwrapping Amazon's Holiday Sales

Amazon (NASDAQ: AMZN) had a pretty happy holiday season, based on the info that One Click Retail just released about the e-commerce giant's most recent quarter.

In this week's episode of Industry Focus: Tech, Fool.com tech analyst Dylan Lewis and contributor Danny Vena dive into what we know about Amazon's sales last quarter so far, and then explain what the numbers mean for Amazon and a few of the little guys who use Amazon as a platform. Find out why Amazon is determined to sell as many home devices as possible, some bright spots and a few big concerns for Roku (NASDAQ: ROKU), how iRobot (NASDAQ: IRBT) is seeing some wins thanks to Amazon, what this holiday quarter did for struggling toy maker Mattel (NASDAQ: MAT), and more.

A full transcript follows the video.

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This video was recorded on Jan. 12, 2018.

Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, January 12. We're looking at holiday data from Amazon, and what it might mean for other companies. I'm your host, Dylan Lewis, and I'm joined on Skype by fool.com's Danny Vena. Danny, how's it going?

Danny Vena: It's good, Dylan. How are you?

Lewis: I'm doing OK. Did you order any gifts on Amazon this holiday season?

Vena: We had just moved into the new house, so Christmas was kind of sparse this year. Didn't really do much shopping. It was mostly about spending time with family this year.

Lewis: That sounds like a pretty nice holiday, though.

Vena: Not bad.

Lewis: I'll tell you, I ordered some gifts on Amazon, as did my mom, and I piggyback on her Prime account, so both of our credit cards are on file, and she wound up ordering gifts for me and paying for them with my card. So I got home, and I was like, Mom, what the heck? But I guess that's the perils of sharing a Prime account and leeching.

Vena: I wouldn't be surprised -- we have one Prime account for my entire family. My wife and I use it, my mother-in-law uses it, my daughter uses it. There's, what, 300 million people in the country and 100 million households, something like that. I wouldn't be surprised if there's a lot of doubling up going on.

Lewis: And Amazon doesn't seem to mind too much. I bought some stuff, my mom bought some stuff on Amazon. We're not the only ones. We're going to take a look at some of the data from their holiday quarter on the show, and also some general industry data that we've seen from e-commerce. We're going to take a look at what that means for Amazon (generally good things -- it's hard for Amazon to put up bad e-commerce numbers), and we're also going to take a look at what some of these comments and data from Amazon might mean for other players in the retail space.

First off, Danny, why don't we talk about some info that we got from analytics provider One Click Retail? This is broad-scope e-commerce data that we got.

Vena: One Click Retail passed along some information about Amazon's holiday quarter. We don't necessarily know exactly how that quarter turned out. But basically, the information they provided said that Amazon captured somewhere in the neighborhood of 4% of all retail sales in the country for 2017, and 44% of all e-commerce sales, which is monstrous.

Lewis: That number is staggering to me. There are a couple of different things I think are worth noting there. 44% of e-commerce sales is crazy. You look at what that translates to on the overall retail footprint. We've talked plenty of times on the show about the idea that e-commerce as a percentage of retail is still relatively small. I think it's just around 10%-11%. We think of e-commerce as this thing that has happened already, but we're still well in the growth ramp of e-commerce.

Vena: Absolutely. And the 10%-11% number that you cite includes things that people are not going to be able to buy on e-commerce, like fuel, for instance. If you back out some of those items, the number is actually quite a bit lower, it's like 8.3%-8.4%, for the most recent quarter. So really a long ways to go.

Lewis: Some great data from industry experts here. We also got some really interesting stuff from Amazon. I think one of the things I really enjoy with this company is their post-holiday-rush press release. You get a pretty interesting picture of what happened with them on some specific product segments, and some general, broad-stroke data on what's going on with them as a company. Two big things really popped out in this press release. One of them is what's going on with Amazon devices, and the second one is what's going on with Prime memberships.

Vena: One of the things that we should point out going into this is, Amazon has always been really cagey about how many Prime members there are and how many devices they've sold. They tell you, "We sold this many more than the previous year," or, "Sales doubled over this time period," but they've never given a base number. So you don't really know how many devices they have sold.

Lewis: Yeah, it's kind of tricky. When you can't find an original number to work off of, you can't even back into a ballpark on roughly what the number is. I know a lot of folks in the industry have tried, and put out numbers as estimates for people to work off of. But it is a bit of a struggle. To your point about that, in the press release, they say, "Amazon devices ... had the best holiday yet, with tens of millions of Alexa-enabled devices sold worldwide." So we have "tens of millions" as a number, basically. That's what we're working with here.

Vena: And that could be 10 million, it could be 20 million, it could be 100 million. We just don't know.

Lewis: Yeah. Those are all factually accurate according to tens of millions. Other info we got -- the Echo Dot was the No. 1 selling Amazon device this holiday season, and I think importantly, the best-selling products from any manufacturer in any category across all of Amazon. That's pretty staggering.

Vena: It is. Three years ago Prime Day started as their Christmas in July. And if you go back to the Prime Day they had this past July, they cited similar statistics, saying that Amazon products were among the best-selling for Prime members, and the Echo Dot was the best-selling device across all of the products across all categories.

Lewis: One other thing that really stuck out to me here is what we saw with Prime memberships. They said that in one week, more than 4 million people began Prime free trials are paid memberships. Of course, they don't parse out how much of that was free memberships and how much of that was paid memberships. Last I'd seen for a number, the company had somewhere in the ballpark of 90 million Prime members -- I don't know if that jives with what you remember, Danny. But that's huge growth within a week.

Vena: That's large growth. And you're right, the last number that I've seen anywhere, there are a number of different players out there who are trying to estimate just how many Prime members there are. Again, Amazon is really cagey with that number, they don't really tell us. But there's a company called Consumer Intelligence Research Partners, which puts out a press release every once in a while when they update what their estimates are, and most recently they said that Amazon Prime has approximately 90 million members. And it's not just the Prime memberships, because they get revenue from the Prime memberships, they get additional sales, but what's interesting to note is, when Consumer Intelligence Research Partners released their data, they also said that your average Prime member spends $1,300 annually, compared to $700 annually for non-Prime customers. That's almost twice as much. So Amazon has a vested interest in getting as many Prime members on the books as it possibly can.

Lewis: To tack on to that, I believe that same data also indicated that Echo users spend an average of $1,700 annually. So there's this hierarchy within Amazon customers of the relevant value of each customer type to the company.

Vena: Right. And that Echo number that you cited, I think that's the first time somebody has put out a number like that. Echo sales have been pretty high. Amazon has a two-and-a-half-year lead in the smart-speaker category. And one of the things they found, and I've seen several analysts have put out data on this as well, that says that people who own an Echo device of any sort tend to spend more on Amazon than people who don't. And this is the first time that anybody has tried to put a number to that.

Lewis: Yeah. And when you see that flow-down of $1,700 to $1,300 to $700, you can understand why they're pushing these devices so much, and why frankly, as an Amazon investor, I'm pretty thrilled that they're selling so well. Looking at the company, the e-commerce business, while it's what they're really known for, in a lot of ways, it's not what makes them most of their money. They basically have under 1% margins in North America, and they're actually losing money in their international e-commerce efforts. AWS, their web infrastructure segment, is really what's driving profits for them and making them able to invest in all of these ventures. You think about the stickiness of an ecosystem and the value of Amazon as a platform, they continue to build that out with things like Prime and with Echo.

Vena: Prime and Echo, but like you said, right now, what's paying the bills is Amazon Web Services. The AWS cloud computing system accounted for not only all of their profitability in the last year, but it also subsidized losses in some of their other categories.

Lewis: It's nice to have a segment like that, that can cut checks for everything else that you're doing, huh?

Vena: Cash cow.

Lewis: One last thing that I want to hit on the Amazon-specific data before we turn things over to company stuff, and this is kind of a razz for you, Danny: The East Coast seemed to be in slightly better holiday spirits this season. Folks bordering the Atlantic Ocean asked Alexa to play holiday music 2.5 as many times than people on the west coast. What's going on over there, Danny? You're in San Diego. You couldn't get into the holiday spirit?

Vena: You know, I think the holiday spirit is a little bit different here. People tend to spend more time outdoors. It's pretty chilly out here, the weather got down in the 50s last night for folks in San Diego. Even during the daytime, it gets sunny, you go outside and walk on the beach, you're not necessarily thinking about playing Christmas music.

Lewis: More of a Mele Kalikimaka Christmas than a White Christmas.

Vena: And if you're familiar with the second half of that, which is appropriate to now, it's Hau'oli Makahiki Hou, which is Happy New Year.

Lewis: [laughs] All right. We're going to talk about three other companies, and what Amazon's press release might say about their holiday seasons. Danny, I think it would be boring to just hit Amazon results. We have a company that we both know is, frankly, crushing it. So to limit the show to that, I think, would be short-changing our listeners a little bit here.

Vena: Just a little. There's so much more going on at Amazon. They're dominating e-commerce sales, they're selling tens of millions of devices -- but not only Amazon is selling on their platform.

Lewis: Yeah. So we're going to take a look at the little guys here. We're going to talk about some of the companies that use Amazon as a sell-through, and what some commentary and data from Amazon might say about how their holiday seasons went. 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.

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.

Vena: More of an indicator than anything else. It's nice to be part of the Amazon press release, gives investors a little taste of what they might be able to expect. But I don't think it will move the needle significantly.

Lewis: The next company we're going to talk about is iRobot, and this is a business that we haven't really talked about before, so it's probably worth giving a quick rundown on what they do and sell, Danny.

Vena: iRobot is the No. 1 selling robotic vacuum cleaner. Basically, it's a small disk-shaped device that you put on the floor, you press play, and it navigates about your house vacuuming as it goes.

Lewis: Yeah. And it seems very futuristic. Frankly, it is futuristic. It's a very cool thing to see in action, see this robot move about your house, pick up lint and crumbs and all that stuff. iRobot did not get name-checked in Amazon's press released, but from Amazon's press release, we have, robot vacuums were among the best-selling home items on Amazon.com over the holiday season. They are, frankly, the de facto robot vacuum cleaner provider, right, Danny?

Vena: Absolutely. In fact, I like to play connect-the-dots a little bit. If you go back again to Amazon Prime Day in July, in that press release, one of the models of the Roomba, which is the iRobot vacuum, that device was the top-selling household item, if I remember correctly, for Amazon Prime Day. So when they called out robotic vacuums, and iRobot is the de facto leader, you can draw a straight line from there to iRobot -- probably did significant business on Amazon during the holiday quarter.

Lewis: And this is kind of consistent with what we've heard from management at iRobot talking about 2017 being a step change for them in adoption of robotic vacuum cleaners. It seems like for them, this is a big growth year, and one where they see adoption really increasing. We look at this being a particularly strong seller in the holiday season, and I do think this is something that's a pretty good sign for iRobot as a business. You look at how they're composed right now, it's the most important segments for the company right now. I think vacuums make up about 80% of their shipment and something like 90% of their revenue.

Vena: Absolutely. It's important to note, if you go back, iRobot also used to play in the defense sector, and they were creating robots for the military to do things like look into buildings, or things that would help out bomb squads, stuff like that, that's what they were trying to get into. And that didn't work out so well. They divested that part of the business in the last couple of years. Now, they're strictly focusing on the consumer market. And you're right, it's more than 80% of their business, these robotic vacuums. They also have a similar device called the Scooba that's good for mopping your kitchen floor.

Lewis: And I believe they also have a small pool cleaner segment as well. But unlike, maybe, the next business we're going to talk about, this is a company where strong sales of the device probably indicate pretty good results for the business, because iRobot's results are so tied to the sales of their Roomba and vacuum cleaner products. I just hinted at this, and we're going to get it now: a company where maybe the impact is a little more questionable, Hasbro. This is one of the biggest companies in the toy and game space. We bring them up because the best-selling toy and game item in the United States per Amazon was the Nerf N-Strike Elite Strongarm Blaster. This is a product, Danny, that I am extremely familiar with, because a lot of Fools wield this model around HQ. So I'm used to being shot with this thing.

Vena: I'm not surprised you would be a target.

Lewis: [laughs] You know, I don't appreciate that. But, no, it's true, it's very true. People seem to love this. It's a fairly simple little Nerf gun, it's not one of those humongous rifle guns. I think they're about $13 or something like that. You look at a company like Hasbro, and with this announcement, they're a company that's kind of in need of some good news.

Vena: Right. If you go back to the last quarter, the backdrop for all of the toy and game industry was the bankruptcy of Toys R Us and the amount of money like big players like Hasbro and Mattel had on the books with Toys R Us when they filed bankruptcy. There was some question whether or not these players would continue to supply Toys R Us with products going into the all-important holiday season. There were negotiations, they got those out of the way. But one of the things Hasbro management made a point to bring up was, there were other avenues where Hasbro sold toys. It was not limited to what was going to be sold at Toys R Us. This is just a good example of the other avenues that management was talking about. They sold a significant number of toys on Amazon, and one of their franchise products, the Nerf, was the biggest-selling toy on Amazon's website.

Lewis: To look at this on a quarter-to-quarter basis and understand what this news item might mean for company sales, this is more important from a broad strategy perspective than a distribution perspective long term, than it will be for maybe the immediate results for this business as we look to their next earnings call. You mentioned before, this is one of their franchise brands, and Nerf falls into that category with other lines like My Little Pony, Transformers, Monopoly. Overall, that segment makes up just under 50% of the company's top line. Nerf is a very strong performer in that segment. It's posted double-digit growth, which has outpaced the 7% growth for the segment. But, because there are so many other brands in that portfolio, it's not going to be big enough to dramatically move their overall business.

Vena: Again, this is one that's probably not going to move the needle -- better as an indicator to look at. Hasbro was not necessarily held hostage to the situation that was going on at Toys R Us, and certainly they're going to continue to grow whether or not they have the same type of growth that they would have seen if Toys R Us hadn't had those problems. We'll find that out when Hasbro releases their earnings. But in the meantime, it's just an indicator that toys were still being sold over the holidays.

Lewis: A shocker. If you're looking for a segment to watch with Hasbro, I would look at their gaming segment. They're posting 20% year-over-year growth. It's on a much smaller base. I think they're around $280 million in revenue as of the most recent quarter. That's really not all that surprising. We look at what's going on in the entertainment, toy, game space for younger kids, and it's increasingly digital. It's starting to look more and more like video games, mobile apps, things like that. The company is getting there. But I think it's something that they need to make happen. It's nice to see that this has some traction for them, because it seems to me like the age window for those classic toys is shrinking and getting smaller and smaller. Kids want to be on iPads, kids want to be on consoles and phones.

Vena: There are a lot of industries that are being disrupted by the onset of mobile devices. I think for Hasbro, they're better-positioned going forward than many of their industry competitors for several reasons. They do have some of the most well-known brands, and they're working on ways for kids to interact with those brands. They have digital games for kids to download onto their devices. They also have used a lot of these brands, like Transformers, in the movie business, just to keep them front of mind with the public. Maybe some of them have been not as successful as others. Transformers is obviously the big one, My Little Pony is another one, where the studio has put out stuff that has resonated with the fans. You had some others that were flops. But Hasbro has an integrated strategy for international sales, omnichannel sales, keeping the products in front of the public's eyes with studio productions. I think they're less going to be a victim of disruption than some of the other players, but that's always something to keep in mind.

Lewis: Listeners, I hope no one lets Vince know that I stole a CG company for this last one that we're talking about here with Hasbro. Danny, thanks for hopping on! Anything else before I let you go?

Vena: No. I heard about the weather that you guys have been having back east, and I'm really sorry to hear about that. I think this weekend, it's going to be in the high 70s in San Diego.

Lewis: You know, we have a flukish day of low 60s right now, and the office HVAC is still on winter settings, so it's extremely warm in here, and it's also extremely warm in the studio, where things tend to run a little hot anyway, so I'm sweating, needless to say. I hope you enjoy that nice 70-degree weather over there. I'm guessing there's no humidity in San Diego right now.

Vena: Not a lot. Last time I checked, it was in the low-30% range. We'll probably get out and take the dog to the beach this weekend.

Lewis: Enjoy, Danny! That does it for this episode of Industry Focus. If you have any questions or just want to reach out and say hey, you can shoot us an email over industryfocus@fool.com, or you can tweet us @MFIndustryFocus. If you're looking for more of our stuff, you can subscribe on iTunes, or check out The Fool's family of shows over at fool.com/podcasts. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Shout out to Austin Morgan for all his work behind the glass. He actually gave me a tip a couple of weeks ago to try eating an apple before the show to make my voice a little bit crisper, maybe make my mouth sound a little bit less saliva-y. I did it today. I think I sound better. I don't know. I'll let you chime in, though.

Austin Morgan: I would agree.

Lewis: That's a ringing endorsement right there. That's why he gets the big bucks. For Austin and Danny, I'm Dylan Lewis. Thanks for listening and Fool on!

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, Hasbro, Mattel, and Netflix. Dylan Lewis owns shares of Alphabet (A shares), Amazon, and Apple. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, Apple, Hasbro, iRobot, 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.