Amazon's Prime membership program now has over 85 Million US members. This program is a huge value driver for AMZN stock.
Amazon (NASDAQ:AMZN) launched its Prime membership program more than a decade ago in the US. While the product has undergone several changes and been rolled out across multiple geographies, the economics behind the service continues to remain hazy. With Amazon preferring to keep the Amazon Prime membership numbers a well-guarded secret, it's hard to work out the membership numbers due to the fact that the company employs differential pricing across different geographies. However, based on third party estimates, it is possible to understand the financial implications of Prime memberships and customers. So, what exactly do the Prime subscriptions mean to AMZN stock and Amazon stock investors? Let's find out.
Amazon Prime Membership Crosses 85 million
Amazon Prime membership is reportedly closing in on Pay TV subscription numbers. As covered by a fellow Amigobulls colleague in a recent post, the number of Prime members in the United States could have hit 85 million, based on the latest reports from Consumer Intelligence Research Partners (CIRP). That's up from 74 million at the end of last year (CIRP estimates), implying a growth of 15% over 1H FY 2017. If the number of Prime shoppers continues to sell at this pace, Amazon could end the year with over 95 million Prime members at the end of 2017. And just to remind our readers, the 85 million figure was reached in June this year, ahead of the Prime day 2017. And more likely than not, Prime day 2017 could have already added more Prime members to that number.
Prime Members To Non-Prime Members Outspending
It's no secret that Amazon Prime members outspend Amazon Non-Prime members. This tendency of Prime members to spur retail spending on Amazon is what lies at the heart of the economics behind the Prime membership program. According to the latest estimates from CIRP (Mar 2017), an Amazon Prime member spends an average of $1300 annually on Amazon, compared to $700 spending by a non-prime member. The $600 excess spending by a prime member is what drives the huge investments into the Prime program, be it in terms of free shipping, content costs for Prime video membership, etc., all of which come in as add-ons to the Amazon Prime membership (at least in some countries).
The excess spending is over and above the subscription revenue which Prime brings to Amazon. As per the latest 10-Q filing for Q1 2017, Amazon's Retail Subscription services generated revenue of $1.94 billion, or $7.76B annualized.
This revenue segment will also bring along another positive for the e-tailing giant. Given that the subscription service revenue is recurring in nature, this is one segment which will likely withstand the seasonal swings of Amazon's retail operations. However, more impressive has been the rate at which this line item has been growing. The $1.94 billion revenue in Q1 was up by 49.2% year-on-year, which is largely reflective of the success of the underlying Prime membership program.
Financial Implications Of The Prime Program
So far in this post, we have outlined the rationale behind the Prime membership program. We now use these inputs to estimate the financial implication of the program, at an aggregate level for Amazon. Based on the latest estimates, the 85 million Prime members will spend, on average, an incremental $600 annually on Amazon. Based on the rough back of the envelope calculations, it translates to $51B worth of sales, which also translates to nearly 36% of Amazon's annualized sales (based on Q1 total sales of $35.7 billion).
In other words, apart from the annualized subscription revenue of $7.76 billion, the Prime membership brings a lot of value to the retail operations of Amazon. No wonder, Amazon is incurring heavy spending to beef up its content game. The online retailing giant is expected to spend nearly $4.5 billion on content this year, in a bid to catch up with online streaming giant Netflix.
Amazon held its Prime day this week. The Prime Day is likely to have boosted Amazon's Prime membership base, due to the fact that the Prime day deals were offered to only Prime members. With a speculated membership base of over 85 million (US) members ahead of the Prime day 2017 and the fact that Prime members outspend non-prime members by a multiple of 2, it implies that the increasing prime membership base brings a lot of value to the core retail operations of Amazon. In other words, the growing Prime membership base will continue to aid the overall growth of Amazon. And with the market continuing to evaluate Amazon as a growth play, the Prime program is a direct value driver of Amazon stock.
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