Amazon Continues To Build A Loyal User Base With Amazon Prime

  • Amazon Prime Day was a big success which definitely will be repeated. Many new premium subscribers signed up who will provide profits for Amazon for many years to come.
  • Third party sellers are growing which is a bullish sign for Amazon considering that there are no fixed costs for the company. Amazon simply receives a commission for letting the user sell on its platform.
  • India has the potential to be a huge market for Amazon if the "third party seller" segment takes off. Growth has been impressive since launch in 2013.
Amazon Continues To Build A Loyal User Base.

Amazon (NASDAQ:AMZN) came out with very impressive Q2 earnings this year and as a result many analysts have increased their fair value price for this tech giant. The strong dollar was earmarked by analysts as a headwind but the projected slower growth didn't materialize. The company reported diluted earnings per share of $0.19 on net sales of $23.18 billion which was well ahead of Amazon's guidance figures. Investors should note here that this company only had revenues of $19 billion in 2008 (full year). With present growth rates (see chart below), there is no reason this company won't surpass $100 billion in sales in the not too distant future.

amazon1

Source : Company Website

Personally I feel that the damage done to the Nasdaq Index (INDEX:COMPX) at the end of last month will take many months to recover. Nevertheless the Nasdaq has rallied off its August lows and could easily pierce through the 5,000 mark once more. Nevertheless I believe caution is warranted at present because of how the index dropped below its 200 day moving average. I have been lightening up on my tech positions of late, but not Amazon. I just feel that this stock has sound fundamentals that will hold up well in the event of a sharp downturn. Let's discuss.

Amazon Prime Day: A Great Value Driver

Firstly this company seems to be well diversified through country and obviously product mix even though its largest market (North America) reported revenues of $13.8 billion last quarter which was 60% of the take. However its Prime premium membership ($99 per year) is growing faster internationally and was definitely aided by "Prime Day" on July 15th this year which even broke 2014 Black Friday sales. Investors shouldn't overlook the fact that "Prime Day" sales will go into Amazon's third quarter figures. Here are the positives shareholders can take from this experiment.

  1. 34 million items were sold
  2. Huge numbers signed up for the premium program as Prime Day's huge discounts were only open to premium members
  3. Amazon received huge exposure in the run up to this event which should increase its brand awareness among potential customers going forward

Bears will undoubtedly point to the margin levels of the items sold because Amazon operates at low margins ($92 million in Q2-2015), but historically this stock had always lower margins when revenues were higher primarily because of product and merchant mix. There is no doubt that Prime day will be held again which should bring in even more subscribers.

Amazon's long term investors know that the new subscribers that sign up are far more important than the dollar amount sold on these days. Analysts sometimes miss this when they evaluate an event like this. These events are all about building loyalty, engaging the customer and essentially all about repeat sales down the line. The mechanics of successful e-commerce haven't changed. Companies must:

  1. Build a list of subscribers
  2. Build a relationship and trust with the list of subscribers
  3. Optimize the list

Amazon's Third Party Business Is Growing

Another reason why I think Amazon is more recession proof than other tech stocks is its third party business. I project that third party vendors will be responsible for almost 50% of company's paid units in just a few quarters from now (see growth chart below):

amazon2

Source : Amazon Website

I think the chart above is very significant when you take into account the macro picture in the world at the moment. If we continue to have this volatility and go back to economic contraction, more and more people are going to be searching for income streams. The chart shows above that more and more people are making money on Amazon. Furthermore third party sales are highly profitable for Amazon as the company doesn't have any fixed costs like it does have on its own products. Third party sales have definitely been responsible for the company's gross margin growing between 3% to 34.6% over the last 12 months. Therefore expect Amazon to put a big push on here to try and get more vendors to use its platform in order to sell its products.

Amazon To Gain Market Share In India

Finally in terms of Amazon's international growth India is the market that springs to mind. Amazon has only been in India a few years but growth levels have been exceptional. Therefore the company has decided to invest a further $5 billion into India in an attempt to make it the second biggest market outside the US. Will it work? Too early to say but I see promising signs. The Indian market has less red tape attached to it compared to China and its huge tech savvy population definitely could be a nice tailwind for Amazon. Furthermore Price waterhouse Coopers state that the Indian e-commerce industry could hit $100 billion by 2019 (last year the industry was valued at $17 billion).

I actually concur with the huge growth potential due to the population and lack of tight regulation. Flipkart and Snapdeal are the dominant players in the country at the moment but I can only see Amazon gaining market share here. Moreover this market really suits Amazon's business model because of the potential volume of customers and also the "third party model" which I think will definitely appeal to the masses. The next 12 to 24 months will be vital here to ensure the company's investment is gaining traction.

Cover image licensed from - 123RF

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