- No stock climbs to the sky, not even Amazon.com.
- Investors are re-valuing the moving parts based on the success of its cloud and Netflix-like features.
- How valuable is Amazon Prime? Really, really valuable!
I have drawn a lot of flack over my bullish articles concerning Amazon (NASDAQ:AMZN).
Things got testy in March, when I called the shares cheap with the shares below $380. When I talked about repricing its “secret sauce,” Amazon Prime, in May, Amazon Stock Price had just passed $425. Today they are over $460.
Even some bears are calling for a retracement in Amazon stock Price.
It is important to note at this point that, at some time in the future, the bears will be proven right about Amazon. Nothing rises like this forever. But at its current valuation of $210 billion, you’re still paying a little over $2 for each $1 in estimated 2015 revenue, which should run at about $100 billion. Or more.
What makes things hard on the bears is Amazon Prime. It looks like a “Free Shipping” deal, a subsidy to regular customers which the bears assume must be costing them a fortune. They forget Amazon’s complex pricing algorithms that can roll those costs into the prices shown on a user’s screen – which may be different for two users looking at the same item at the same time. They also tend to ignore Amazon’s infrastructure for breaking bulk and shipping cheap, which probably makes its shipping costs lower than anyone else in the industry.
Consider. UPS (NYSE:UPS) had total revenue last year of about $58 billion. Federal Express (NYSE:FDX) had revenue of about $47 billion. If Amazon is shipping roughly $80 billion in products a year, it’s more than just a major account to these folks, as it is more than a major account to the U.S. Postal Service. It is a dominant account that can make or break these transportation stocks. These companies must make sure they please Amazon, which means giving Amazon the best possible deal. So, no, Amazon is not losing money on the “Free Shipping” in Amazon Prime.
Amazon Prime is, in fact, something more like Netflix (NASDAQ:NFLX). It includes a ton of “free” music, and a ton of “free” video, and it has something Netflix does not have – real pricing on other stuff. I’m flying to the West Coast this week, and while I’m a Prime member I’m going to pay to rent movies for the flights, probably for about $5 each. These movies come out in the same window used for DVD sales, Christmas releases like “Unbroken” and even later releases like “The Kingsmen.” All this is incremental revenue.
It can be hard to parse all this out from Amazon’s reported results. While the company did deliver on its promise to break out Amazon Web Services last quarter, which could be worth $50 billion, and while we know about how many Amazon Prime customers there are (about 40 million), meaning that’s a $4 billion top line by itself, we don’t get visibility into all the moving parts. How many additional rentals are made by Prime customers, how many purchases? We know that Prime customers are far more loyal than any other e-shoppers, abandoning far fewer shopping carts before completing their purchases.
What could cause Amazon to miss its “whisper number,” which presently stands at a loss of 12 cents per share on revenue of $22.36 billion? Maybe the European tax man will finally get his due – that could cause a shortfall on the bottom line. Maybe cloud customers are finally turning away from “bare iron” infrastructure toward structured software and services, although I doubt it. Maybe Amazon’s consumers just didn’t buy as much last quarter, which is why Amazon is going out of its way to create “Prime Day” tomorrow, with tons of stuff on sale?
At $463, Amazon stock is priced to perfection, as is Netflix, and as are only a few other companies in the investment world. All such stocks have their Waterloo.
But it won’t be this week.