Here’s my findings about Amazon’s Prime membership by the numbers:
10 million – The total number of Amazon Prime subscribers, according to Piper Jeffray. This number is up from 6 million in 2010, and 2 million in 2009.
$900 – The amount spent by an average Amazon Prime customer in their first year. A typical customer spends $400 per year before switching to Prime. These numbers were most recently reported by FastCompany magazine. Shoprunner says this number may be closer to $1500 per person.
82% – The percentage of Prime customers who will buy from Amazon even if a product can be found elsewhere at a lower price. Few retailers enjoy this much loyalty.
$11 – The amount Amazon loses to provide Prime memberships to its customers. At $79 per year, the typical member requires $55 in shipping subsidies and $35 in digital content acquisitions.
40% – The percentage of revenues Shoprunner estimates to come from Prime members. BusinessWeek pins this number lower, at only 20% of revenues.
19% – The percentage of Amazon products that are cheaper than the same product on Walmart, according to a Wells Fargo study by Matt Nemer.
43% – The percentage of global sales that were related to media (books, shows, movies, etc.) The year 2010 was the first year that Amazon sold less media than other products, an indication that the company is no longer just another book and music store.
My Take on e-Commerce
From a qualitative standpoint, I don’t think anyone understands online retail better than Jeff Bezos. Not only has he built a strong brand with Amazon—a growing portion of online shoppers now go direct to Amazon for consumer purchases—but he’s also betting big on the future with Amazon’s cash on hand.
I also like the reality that Amazon has a strong position in global shopping data. The company launched AmazonBasics in 2009, a private label brand which allows the company to compete on price for commoditized goods like CDs, DVDs, hard drives, and other products where the “specs” outweigh the brand itself. This brand extension is great for margins. Alas, retailers are catching on to the shift in consumer spending. Major brands are opening smaller stores to combat online retail’s convenience factor.
From a quantitative standpoint, the company is fairly-valued, if not over-valued. I tend to stay away from firms in which I have to make a guess about future free cash flows.
In particular, the biggest risk to Amazon as a company is that their desire to market themselves as the least expensive destination for consumer purchases remains risky. Competing on price is the surest way to kill margins.
Alongside this risk is the potential that Amazon has to “Netflix” it’s customers by raising prices for Prime. Ultimately, I expect the cost of Prime services to be held constant while prices for goods sold on the company’s website are pushed marginally higher. (I have a post evaluating Amazon’s strategy in undermining Netflix as the content-delivery king.)
Get Safer Exposure
I’m not one to think that you have to get exposure at the source. Amazon—and all of online retail, for that matter—may be a growth market, but Amazon’s insistence on lower prices may ultimately hurt margins. Likewise, Amazon isn’t exactly cheap at nearly 100 times earnings, and 35 times cash flow. I like growth stories, but I don’t buy growth stories.
If the trend for online retail is certain—I can’t see online retail shrinking—a play on UPS or FedEx might be a better play. Both companies are cheap relative to current earnings and cash flow generation, and each benefits from greater parcel volumes. If Prime subscriptions continue to grow as they have, and consumers realize the benefit of always-free shipping, FedEx and UPS both benefit from greater parcel revenues, no matter how much Amazon has to subsidize purchases on its website. (Sidebar: I wrote about the natural benefit of e-commerce in that it is far less strenuous to energy supplies. Yes, shopping online is eco-friendly!)
But what about the media!
Of course, a play on transportation does not allow you to profit from digital content sales. The Kindle Fire, which Amazon is supposedly subsidizing to the tune of $10-50 per unit, may prove to be a reliable source of high-margin app and media sales.
Canalys, a mobile research firm, expects app revenues to grow to $14 billion industry-wide by 2012, up from $7.3 billion in 2011. The leader in this space is Apple, which has a fairly strong competitive advantage over Amazon. Apple’s products, specifically the iPhone, are subsidized by cellular companies to a price point of $199 or less. Amazon does not have the same benefit in releasing the Kindle, which does not enjoy the same telecom subsidies to consumers. Instead, Amazon has to eat the loss directly from its balance sheet.
Disclosure: No positions in AMZN, FDX, UPS at the time of writing. I have been an AMZN shareholder in the past, but it doesn’t exactly scream value to me. However, I do have AMZN and FDX in my watchlist at Fool.com, and have picked Amazon as a “top pick.”
Photo by: Rbowen