Around the world, more than 1 million new members were added to Amazon (NASDAQ:AMZN) Prime during the 3rd week of December 2013. Amazon reported a record-setting holiday season for its Amazon Prime service. In 2013, the entire holiday season was best for Amazon. On Cyber Monday, more than 36.8 million items were ordered worldwide which resulted in a record breaking quantity of 426 items per second.
Amazon Prime costs $79 annually and offers various perks and services such as free two-day shipping, Prime Instant Video and Kindle Owner's Lending Library. If a customer didn't intend to continue their membership after the one month free trial the membership can be cancelled. And if a customer hasn't placed an Amazon Prime-eligible order a full refund is granted.
The Prime instant video selection has increased from 33 thousand to 40 thousand TV episodes and movies in 2013. More than 150 thousand movies and TV episodes are now included in Amazon Instant Video. Prime Instant Video is the exclusive online-only subscription base for hundreds of TV seasons including many PBS and CBS series and many hit TV shows. It also offers an exclusive collection of kids shows that is not available on any other online-only subscription service. Prime members who own a Kindle can borrow books for free without due dates from the Kindle Owners' Lending Library. The selection in this library was 475 thousand books in 2013.
During the entire 2013 holiday season, Amazon Prime was so popular that the company had to limit the new Prime membership signups during peak periods to ensure that the services to existing customers were not compromised due to the outpouring of new membership signups. Amazon Prime membership continues to grow and there are tens of millions of Prime members worldwide.
The reason for quoting the aforementioned facts was to demonstrate the efficiency, popularity, and acceptability of Amazon Prime among a large base of customers worldwide.
A lot of debate is going on regarding Amazon Prime's prospective fee increase by $20 to $40. In my opinion, in the long term this move will benefit the investors since in the past few years the service has grown rapidly. Amazon Prime had around 20 million subscribers in December 2013. The enthusiasm for the service was so great that the company found it very difficult to quickly add capacity to its warehouses to cater to the shipping demands of its Prime customers. According to Colin Sebastian, Amazon Prime customers are loyal to the company and the service and this move will not stunt Prime's growth and customers get a lot of value out of their Prime membership.
As per my understanding of the Amzon.com business model the investors have long believed that the company would use its low prices to gradually wipe out the competition in many product categories and having outdone the competition Amazon would be in a position to reap the fruit of its huge market share. But the point of concern is whether or not the increase in prices will cause a boost in the stock price or not. One of the very interesting facts is that people are ready to buy shares of biotechnology companies that have almost no revenues as they wind their way to possible introduction of their first product and then generation of revenues. When a company has low revenues or profits the investors feel free to imagine how much the company could be worth if it ever was able to overcome all the hurdles needed to fetch higher profits. In my opinion the same argument could be made for Amazon. As long as the company pursues its strategy of thin margins the investors are free to imagine how much Amazon will make when it finally begins to raise its prices.
Amazon has 237 million active customers and has been pouring money into new ventures ranging from free videos for Prime subscribers to new warehouses. The undying question is when it will turn all of those expansions into profit? In my opinion, raising fees for 25 million Prime subscribers means that increases in profits are impending. Amazon is just at the beginning of testing price increases and if it does not result in major subscription losses I guess the company will try to continue raising prices. This scenario made me think that the enduring macroeconomic uproar in the markets will drive down Amazon's stock further to the point where there will be an attractive long-term entry point.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article