- Amazon has launched its payments service Amazon payments.
- The service could drive bottom line growth at the company, highlighting the need for an earnings focussed model.
- Dislodging PayPal, with its clear first mover advantage will be a challenge for the new service to succeed and move the needle on Amazon’s bottom line.
Amazon (NASDAQ:AMZN) last week (June 9, 2014) launched its payments service. We had previously covered Amazon's payment service potential and also looked at the entry of Amazon and Facebook into online payments. Today, we focus on the fact that an entry into this space will aid the bottom line of Amazon. This will be a huge positive as investors are now demanding a greater focus on earnings, which is clear from many of Amazon’s recent moves like increasing the prime membership fees, increasing the minimum free shipping order, etc.
Online payments: An Opportunity That Can’t Be Ignored
Online payments industry has been in a state of rapid growth over the last few years and is expected to continue its extraordinary growth over the coming years.
Source: Capgemini WPR 2013
Amazon’s entry into the online payments case can best be described as a case of ‘better late than never.’ It is surprising as to why the largest e-retailer and probably the most aggressive and innovative retailer of our times has remained out of this industry. It is even more surprising when we consider the fact that Amazon has consistently endeavored to create an ecosystem which can engage the user across multiple activities. A case in point is the firm recent entry into music and also the launch of Amazon Prime fresh, the grocery delivery service.
An online payments system will not only aide additional revenue, but it also helps create a more holistic e-commerce ecosystem. The online payments service of EBay has been a differentiation of sorts at eBay, both financially as well as from the point of a holistic ecosystem. PayPal’s financial impacts on eBay cannot be understated, with the investing community hailing PayPal as the golden egg investment of eBay. Amazon’s lack of interest in this space until now is therefore noteworthy and inexplicable.
Amazon Payments Will Help Expand Bottomline
Amazon finally launched its payments service last week with the following terms and conditions
- Transaction fees of 5% + $0.30 for transactions of up to $9.99.
- Transaction fees of 2.9% + $0.30 for transactions of $10 and above with flexible pricing options depending on the payments volume processed, displayed in the table below.
Source: Amazon Payments
The pricing is higher than our expected flat rate of 2%, which was used in our revenue estimates for Amazon’s payments service. Using the count of 244 million active users and a GMV of $60.9 billion, and minimum order value of $80, we get number of transactions for 2013 at 761 million transactions. This gives us the total revenue potential of $837 million, using the assumption that Amazon processes 50% of payments in-house. This compares against our earlier estimate of $609 million annual revenues. More importantly these will be commission based revenues with a higher drop down to the profit margin levels, a fact which has resulted in consistent bottom line for Amazon’s competitor eBay. Therefore Amazon Payments could drive bottom line growth at the company.
In conclusion, a successful launch of Amazon payment service and movement of transaction payments onto the service could expansion of profit margins at Amazon. However, given the current head-start enjoyed by PayPal and other online payment processing services, the clouds of uncertainty surrounding Amazon’s online payments service continue to hover. Our Amazon stock analysis show that the combination if the current valuations: price earnings ratio of 518 and a price to sales ratioof 1.92, implies high risk in the trading levels of Amazon. In view of the above risks and current valuation levels, we continue to reiterate our negative long term look on Amazon stock.
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