- The increase in Prime is a sign that inflation is real.
- Margins will still be under pressure.
- Expect a 15% drop off rate.
When costs go up, companies try to pass those along to customers (inflation), and that is exactly what is happening at Amazon (AMZN). As costs increase virtually across the board, including of course the fulfillment and shipping costs for Amazon, margins have come into question. When EPS results have historically been lackluster, that poses a problem.
Right or wrong, we all know that investors are mostly attracted to AMZN because of the revenue growth rates. With quarterly revenue growth rates in excess of 20% for as far back as I can remember, we all should sit back and take notice. The problem is that EPS growth does not exist; it has been flat in the face of that staggering revenue growth.
That brings questions about margins onto the table, and when costs go up by an average of 20%, investors start to get concerned. That is exactly why AMZN fell from over $400 in January. The company already has a meager EPS-Revenue Growth ratio historically, so when margins get impacted that has a compounding influence on EPS, the real focus of smart investment dollars when it comes down to it. Revenues matter, but s long as there is light at the end of the tunnel for EPS too.
Today, some light may have been shed on this concern, as AMZN announced an increase in the price it charges for its Prime Subscription. That includes free shipping, and access to Prime online video content. I am a Prime Customer, and I will not cancel my service, but all we have in my household is streaming TV (using a smart TV), we do not have normal cable, so I may not be the best case-study.
What I do know is that Prime is no longer as attractive as it once was for most people. Downton Abbey has been dropped, and so has Suits, unless you pay for them, and in fact almost all of the good content is paid content anyway. Basically, with the exception of a very small few, Amazon charges Prime customers to access content that they in turn have to pay for (hmmm). With the recent increase in price, I believe the impact will be more serious for Amazon than most people believe.
The drop-off rate will probably be in excess of 15% after a 3-6 month timeframe, but for now Wall Street is embracing the decision. The increase is at the low end of the expectations, and that will make the drop-off less severe most likely, but that does not change the EPS-Revenue growth ratios, and that does not change the margin pressures that exist.
As a result, Stock Traders Daily plans to initiate profit stops on the positions we advised clients to buy when the stock tested longer term support on the recent dip. Those positions are nicely in the money, and initiating a profit stop in line with our real time trading report for AMZN will be healthy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. AMZN was recommended to clients of Stock Traders Daily at lower levels.
Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.