What’s Next for AMZN Stock?
Amazon.com, Inc. (NASDAQ:AMZN) recently held its second annual “Amazon Prime Day,” a special holiday set out for premium members of the company’s “Prime” service. Unfortunately, there was a slight hiccup in the checkout process, which negatively affected sales and, in turn, AMZN stock.
What’s shocking is that Amazon Prime members now outnumber regular shoppers on the e-commerce web site. An independent research firm estimates that 19 million people signed up for the service in the last year, raising the total from 44 million to 63 million. (Source: “Amazon Prime Members Now Outnumber Non-Prime Customers,” Fortune, July 11, 2016.)
What Prime Day Means for AMZN Stock
Amazon doesn’t release the official numbers for its Prime Day sales, so we can’t be sure if these numbers are correct. If they are accurate, it would mean that Amazon Prime membership grew by 43.18% in a 12-month period. That is the only number that matters when valuing AMZN stock. In fact, that figure is going to be the driving force of the company over the next few years.
Part of the surge may be due to a subtle change in Amazon’s pricing strategy. The company used to have Amazon Prime available at an annual rate of $99.99. In April, the company started offering memberships for a monthly fee instead of $10.99. Customers loved the flexibility of choosing between a monthly or annual subscription.
For its retail strategy, the company has made Amazon Prime an axis around which all other programs are structured. Everything revolves around the singular goal of driving higher enrolment in the premium club.
With Amazon Prime, customers get access to free two-day deliveries, not to mention a wide library of movies and TV shows. They are all part of Amazon’s video streaming service, which is currently starting to take on competitor Netflix, Inc. Other than Hulu, a network-backed streaming service, Amazon Prime is the only real threat to Netflix.
It’s obvious why the company wants more people shepherded into Amazon Prime. Not only would it give the company a wide base of revenue, but it also appears to result in higher sales, with Prime members reportedly spending more than non-members. According to the same independent research firm, people without an Amazon Prime subscription spend about $500.00 compared to $1,200.00 by Prime members.
That extra $700.00 per member can go a long way, too. Just think about the additional 19 million people who subscribed within the last year. I’m sure most, if not all of them, were already voracious Amazon shoppers.
Using some quick arithmetic, we can calculate that the new Amazon Prime members would add an extra $15.19 billion in revenue to Amazon’s books. Only $1.88 billion of that sum would come from the actual subscription fee, while the remaining $13.3 billion would come from increased sales.
Just to be clear, this is assuming the new Amazon Prime subscribers are choosing the yearly package. If most of them are choosing the monthly offer, then the increase in subscription fees would be greater than anticipated.
In any case, the material point is that Amazon Prime has a compounding effect on the company’s overall position. Jeff Bezos has called it Amazon’s “flywheel,” which is a mechanical term for a heavy disk that boosts the momentum of an engine. He’s basically trying to say that AMZN stock can keep its upward trajectory as long as the company is funneling customers into this program. So far, it seems to be working.
In all likelihood, more customers are going to be seduced by the offer as Amazon’s catalog of movies and TV shows deepens. The company is reportedly spending more than $4.0 billion on video and music content in 2016, an amount exceeded only by Netflix.
The Bottom Line on AMZN Stock
Whether or not Amazon Prime Day met expectations is irrelevant. It was still the biggest one-day haul in the company’s history, with sales jumping more than 60% compared to Prime Day 2015. For this reason, I remain strongly bullish on AMZN stock. (Source: “Amazon’s Prime Day is the Biggest Day Ever,” Amazon.com, Inc., July 13, 2016.)