If you invested in Amazon.com Inc. (NASDAQ:AMZN) a year ago, you are likely to be smiling now. In 12 months, Amazon’s stock price surged 59.3% from $331.19 to $527.55. Moreover, according to RBC Capital Markets analyst Mark Mahaney, Amazon could be going to as high as $705.00 a share. (Source: CNBC, September 11, 2015.)
RBC increased its price target on Amazon from $650.00 to $705.00. That is 33.6% higher than Amazon’s current price! However, if you look at the two powerful growth engines the company has, you’d see that $705.00 is quite achievable.
Success of Amazon Prime
During the company’s earnings call for the second quarter of 2015, Amazon’s CFO Brain Olsavsky attributed a lot of the revenue growth to the growing adoption of Prime. In the second quarter, the company’s net revenue surged 20% year-over-year to $23.18 billion. (Source: Seeking Alpha, last accessed September 11, 2015.)
Amazon has never given out specific numbers on its Prime membership. However, according to the third annual Amazon consumer survey, Amazon Prime’s adoption has been increasing rapidly, with U.S. Prime adoption climbing from 25% of Amazon’s customers in 2013 to 40% now. By this standard, Amazon Prime would have between 60 and 80 million subscribers globally.
Prime members also show a high level of brand loyalty, with 75% of Prime members indicating more Amazon usage today compared to when they first joined Prime.
Moreover, the longer they stay in Prime, the more they spend. The survey suggests that 49% of first-year Prime members and 68% of year-four subscribers spend over $800.00 on Amazon each year. Mark Mahaney believed that the survey results that suggested Amazon’s revenue growth would be sustainable for the longer term.
Amazon Prime: The Flywheel Effect
The growth of Amazon Prime benefited from a flywheel effect. Initially, when Prime membership offered two-day shipping, more customers signed up for it. As a result, more vendors wanted their products to be eligible for Prime status. As more products became available in Prime, the membership became even more attractive to customers, and the growth wheel kept turning.
Amazon Web Service (AWS): Cloud Computing
Other than the successful Prime business, the company has another growth engine—its cloud computing service called Amazon Web Service (AWS). So far into the year, growth in AWS has been quite extraordinary: in Q1 2015, AWS net sales increased 49.1% year-over-year to $1.57 billion. In Q2 2015, AWS net sales surged an even more impressive 81.5% year-over-year to $1.8 billion. Operating income from AWS totaled $391 million in the second quarter, a more than 400% increase compared to the $77.0 million in the same quarter last year. (Source: Amazon.com Inc., last accessed September 11, 2015.)
Cloud computing is an industry set for exponential growth. According to Global Industry Analysts Inc., the market for global cloud computing services is expected to grow to $127 billion by 2017. (Source: Openview, last accessed September 11, 2015.)
Bottom Line Improving
At the end of the day, top line growth needs to translate into earnings. And on that front; Amazon has surprised investors. The company was expecting its bottom line to come in at between a loss of $500 million and a profit of $50.0 million in the second quarter. What was the actual result? A net income of $92.0 million! If the company continues its impressive growth in both the top line and bottom line, investors might reward it with a $700.00 price tag.