Amazon Share Price: Does Amazon Prime Add Value to the Stock?

on Feb 9, 2015
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Happy Belated 10th Birthday Amazon Prime!

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On Monday 2nd February Amazon Prime celebrated its 10th birthday. For Amazon’s Jeff Bezos, Prime is the best thing since peanut butter and jelly, but there remains very little quantifiable data to paint Amazon Prime in the light that its parent company wants it to be seen in. True, Amazon Prime offers ‘All-you-can-eat’ express shipping to Amazon (AMZN) shoppers, but the price of this all-inclusive service keeps on rising. Prime members have many benefits nowadays, including free 2-day shipping, Prime Instant Video, Prime Music, Prime Photos, Prime Pantry, Amazon Elements, Prime Early Access, Kindle Owners’ Lending Library, Kindle First and Membership Sharing. As yet, nobody knows quite how many Amazon Prime subscribers there are, and Amazon isn’t telling. This article will attempt to detail the positives and negatives of Amazon Prime and its impact on Amazon stock in general.

Is Prime Instant Video a Threat to Netflix?

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Besides the free 2-day shipping and Prime Instant Video, Amazon Prime is a $99 per year subscription which needs to be looked at carefully before you sign up. Prime Instant Video is fast positioning itself as the numero uno competitor of Netflix. This month, Prime Instant Video will be adding plenty of movies to its streaming platform, including its very own original series – Transparent. Among others, Prime Instant Video now showcases top titles like Airplane II: The Sequel, Hitch, Air Force One, Tootsie, Sense & Sensibility and newer movie releases like Robocop 2014 scheduled for later in the month. At its current price tag, Prime Instant Video currently runs $8.25 per month – compared to Netflix’s $7.99 fee for existing members and its $8.99 fee for new members. Netflix currently has 39 million subscribers in the US.

Has Amazon Prime Contributed to Amazon’s Impressive Performance?

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Consumer Intelligence Research Partners (CIRP) of Chicago recently conducted a survey and found that an estimated 45% of US-based Amazon customers are Prime members. According to Quantcast, the number of unique US visitors for December 2014 at Amazon.com was listed as 90,933,929. That puts the number of Prime Members at almost 41 million people. In Q4 2014, Amazon’s earnings topped expectations with EPS at $0.45. That exceeded estimates of $0.17 p/share. Amazon’s net sales increased by 15% during Q4, 2014 and this was attributed to its cloud services businesses and strong domestic demand. The company’s business model received plaudits from Banc De Binary analysts after posting a 2% operating margin in Q4 after a dismal -2.6% operating margin in Q3. Even with these positive results, it’s a little foolhardy to expect Amazon to continue to deliver strong performance in the coming quarters. Of the most concern to investors is the need for Amazon to lower its costs structures to maintain profitability in coming years. Amazon (AMZN) is currently trading at $363.55 per share and has a market cap of $169.25 billion. The stock price hit $402 in December 2013 and is trading near its all-time highs. The 52 week range has considerable variation from $284 on the low end to as much as $383 on the high end.

The Prime Numbers: How Do They Add Up?

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Equally important is the lagging performance of Amazon in the international arena. This is especially worrying considering that Amazon has poured tremendous capital into emerging market economies. In those regions, e-commerce is highly competitive. The 12-month trailing cash flow for Q4, 2014 was listed as $1.9 billion but that doesn’t tell the whole story. If you subtract all the capital obtained via capital leases and all principal lease repayments the real figure is -$2.2 billion. This makes Amazon (AMZN) a stock that you should not be investing in at this present time. On a positive note, Amazon Prime subscriptions reportedly grew by 53% year on year in 2014. In contrast to Amazon’s general performance, Prime memberships thrived in global markets such as Japan, Austria, Spain, Canada, Italy, Germany, France and the UK.

Prime has shown strong growth prospects, in spite of is rising membership price. Consider that it was first offered at $79 per year with 2-day shipping on over 1 million in-stock products. Now, Prime costs $99 per year and it’s available on over 20 million in-stock products. There is a school of thought that Prime members tend to spend more, but the flip-side of the coin is that Amazon customers who generally buy a lot on site will do so regardless of their Prime membership. But these may well be misleading stats about Prime memberships since the service offers free trials to members. There is no telling how many family members in a household use their own Prime memberships or whether they switch from one free membership to another.

The strategic objective of Amazon Prime is to create loyalty among shoppers. By eliminating the costs associated with online deliveries, shoppers will be less likely to buy elsewhere. And with all the added extras, many industry analysts believe that Prime offers far too many enticements for Amazon shoppers to consider the competition. Based on the few available Prime stats, members tend to spend around $1,500 annually – 300% more than non-Prime members. Owing to the huge variety that Prime brings to customers, it is also able to attract a diverse audience. From movies to household goods, clothing and books – Prime offers it all. It may be a fine balancing act that Amazon is walking with its Prime service. Amazon may be attempting to grow market share at the risk of its own long-term profitability. Perhaps the rationale is that by the time the numbers are satisfactory, Prime will start becoming profitable.

 

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