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Amazon Finally Thinking of Profit Margin

March 23, 2014 | About:

Fundamentals have been against the Amazon (NASDAQ:AMZN) stock for over a decade. But the stock continues to outperform. 5 years ago it was a 75$ stock. Now it is a 375$ stock. Amazon has been an excellent story for all its investors but what remains to be seen is whether it can continue to be one.

Prime Is Now Dearer

Amazon has recently announced that its Prime Service would now cost $99 instead of $79, a clear $20 increase from the old price. Amazon Prime offers users free shipping, access to Amazon’s video offerings, free Kindle book rentals and a host of other services. The separate Amazon Fresh service that delivers groceries will still cost $299 a year.

While there have been a lot of talks stating that Amazon will lose customers due to this price hike, it is interesting to see that the stock has hardly been impacted after the news was announced. Besides, it should be good news for investors that the company is finally thinking of Profit-Margins and monetizing good products.

Amazon Prime currently has a user base of 23 Million. So the increase of $20 per user would mean an addition of $460 Million to the bottom line of the company.

Focus on Revenue per User

Amazon Prime Customers spend twice as much as non-Prime customers and to them; paying extra in lieu of more convenience is a perfectly rational choice. So, the thought process here is that even if some of the user base may migrate due to the increase in price, the people who stay will continue to spend more.

Incidentally, this may also be the only explanation why Amazon is foraying into streaming video devices from Next month. Apple(NASDAQ:AAPL)TV, Roku and Chromecast and a huge list of Smart TVs and Gaming consoles are already fighting for a piece of the cake in this segment. Amazon has one of the world's strongest tech brands and a pre-installed user base who would not think twice before purchasing a device from Amazon. Even a 100$ bill for an Amazon device to 20 million customers wouldn’t be such a bad idea.

Competitors Looking to Cash in

Amazon has to wary of competitors like ShopRunner who are looking to cash in on the price increase. ShopRunner has a lower subscription cost and also offers free two-day shipping on merchandise from more than 85 online retailers. The company has already started offering free One year Subscriptions to Amazon Customers.

Also with Alibaba entering the US Market, Amazon could face some serious competition.

So would You be Investing in Amazon?

It may not be a good idea to commit more capital to Amazon. You would be better off trimming the long position, as the stock has been broadly hugging the 150 Day moving average. And the stocks have recently rallied back from an 18% correction. You could take advantage of that recent rally as up around the 380$ mark the stock could face a major resistance as it has done in the past.

Disclosure: I do not hold any position in the stocks mentioned in the article.

About the author:

The author holds a Management Degree in Finance and provides deep insights primarily in the fields of Telecom,Automobile,Technology and retail

Rating: 2.5/5 (2 votes)



Dr. Paul Price
Dr. Paul Price - 3 years ago    Report SPAM

You said... "Amazon Prime currently has a user base of 23 Million. So the increase of $20 per user would mean an addition of $46 Million to the bottom line of the company."

Check your math. 23 MM x $20 = $460 MM not $46 MM.

Gaurav Das
Gaurav Das - 3 years ago    Report SPAM

Hi thanks for pointing it out. Have rectified it.

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