Why Amazon Stock Could Jump Even Higher
Although shares of Amazon.com, Inc. (NASDAQ:AMZN) trade at far above its earnings, there is a reason why investors hold so much faith in AMZN stock. The demand for Amazon stock was, more than anything else, a belief that CEO Jeff Bezos knew what he was doing.
Critics have scorned AMZN stock as an accidental cult of personality, arguing Bezos gained the trust of markets by simply crafting an appealing narrative. These critics think that his personal charisma is the reason Amazon stock has performed so well over the decade.
But they’re wrong. I’m not saying everyone who bought AMZN stock knew the minutiae of Amazon’s plan, but they understood its overarching premise. To put it simply, Amazon believes that monopoly power will make it a winner.
I don’t mean monopoly in a sinister sense; rather, I’m suggesting that Amazon thinks it can prop up its stock by offering customers a better deal than competitors. By slimming down margins in the short term, they hope to win a majority of the market share in the long run.
Amazon employed the same strategy for almost all their product lines and something strange happened—it worked. Massive retailers like Wal-Mart Stores, Inc. are now trying to mimic the Bezos strategy because they’re losing ground to Amazon each day.
But surely Amazon stock can’t survive forever on the promise of future earnings? This is true and that’s where “Amazon Prime” comes in.
AMZN Stock Depends on Prime Numbers
The unifying piece of Amazon’s strategy is a premium service called Amazon Prime, which can be purchased for an annual fee of $99.00. Prime is the catalyst that AMZN stock needs.
By adding more value to the Prime membership, Amazon is trying to generate enough cash to keep investors bullish on their stock. Some features will cost extra depending on how capital-intensive they are, but on the whole, Prime is a flat fee. (Source: “Why This Could Be the Year Amazon Finally Reveals How Many Prime Members It Has,” Re/Code, January 28, 2015.)
Signing up for Amazon Prime is growing more and more popular. Subscribers can stream music, movies, and get unlimited two-day shipping, among several other perks. Amazon needs the funding if it is to win a battle with Netflix, Inc., even while the firm battles retailers, book publishers, and cloud-computing rivals.
Ordinarily, I turn bearish on companies that try too many things at once, but Amazon is special. The sheer breadth of Amazon’s business is designed so they can put together uniquely brilliant cross-product offerings that customers will find irresistible.
If you can run a web site through Amazon Web Services and also order all your supplies on Amazon, why wouldn’t you? A subsect of Amazon Prime even lets you order food for delivery to you house. Imagine paying a flat fee and getting Chinese food while streaming a good movie. OK, now stop imagining, because that offer is real (in select areas, anyway).
Amazon Stock Poised for Massive Growth
Just how big of an effect will Amazon Prime have on AMZN stock? Well, that depends on how many people have Prime subscriptions. Jeff Bezos keeps that number fairly secret, but we know it’s in the “tens of millions,” meaning Amazon stock is in good shape.
A quick calculation shows us that Prime could already be earning its keep at Amazon. Revenue from subscriptions could be well into the hundreds of millions, not to mention that Amazon Prime customers are far more loyal; they spend more money through online purchases, meaning they contribute to Amazon in more ways than one.
Little by little, Amazon is adding new sources of revenue, driving a surge in profits. Rising earnings will eventually justify the high price on Amazon stock and the bears will finally be silenced. That was—and is, for that matter—why people love AMZN stock.