Amazon Still Has A Lot Of Growth Potential Driven By Prime

Summary

• Amazon's product and service sales grew a combined 29% year over year in the third quarter of 2018.
• Prime continues to grow, and more subscribers have already signed up for Amazon Prime in 2018 than in any previous year.
• Prime now has over 100 million subscribers, but has the future potential to add many more subscribers as the service is made available in more and more countries.

Amazon (NASDAQ:AMZN) has experienced impressive growth so far, and the company has a lot more room to grow. Amazon is taking its substantial cash flow and making acquisitions to further enhance its growth rate. Shareholders can also expect to see organic growth as Amazon Prime continues to grow its membership over the next several years. Amazon Prime membership now has over 100 million subscribers around the world.

According to the company's latest 10-Q filing, growth in sales and services has been impressive in the last year. In the third quarter of 2018, the company's sales and services grew 29% year over year. Here is a look at the key part of Amazon's income statement:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2017				2018				2017				2018
Net product sales	$	28,768			$	33,746			$	77,248			$	97,215
Net service sales	14,976				22,830				40,165				63,289
Total net sales	43,744				56,576				117,413				160,504
Operating expenses:
Cost of sales	27,549				33,003				73,439				94,370
Fulfillment	6,420				8,275				16,275				23,999
Marketing	2,479				3,303				6,629				8,902
Technology and content	5,944				7,162				16,306				21,168
General and administrative	960				1,041				2,630				3,219
Other operating expense, net	45				68				155				211
Total operating expenses	43,397				52,852				115,434				151,869
Operating income	347				3,724				1,979				8,635

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The key driver of growth for Amazon over the next few years should be Amazon Prime. The reason is Australia became only the 17th country in 2018 to have Amazon Prime available to its people. Members of Amazon Prime ordered more than 2 billion products with one-day or faster delivery service in the last year. There are many more countries available to expand and grow Amazon Prime.

Amazon Prime members currently pay $119 per year for the service. While there are many perks for Amazon Prime members, the most sought after reason for joining is free shipping on Amazon Prime purchases on their website and Prime Video. Most members order enough products from Amazon that the free shipping alone is worth more than $119 per year. It becomes very noticeable during the Holidays when many presents are purchased.

Our family has started buying a large bottle of Colavita olive oil every couple of months from Amazon. This is a higher quality olive oil and is not available in our local grocery store. We also buy diapers for our granddaughter from Amazon because we get a better price than at our local grocery store. I am sure we could be taking advantage of many similar opportunities and plan to explore more options this year.

The other significant driver of Amazon Prime membership is Prime Video. While Amazon Prime is only available in 17 countries, Prime Video is available in over 200 countries for a separate fee. As Amazon Prime is made available in more and more countries, the Prime Video subscribers will see that they can add Amazon Prime for a small additional fee.

Amazon is really starting to ramp up its original content so that the only way to see these shows is to be a member of Prime Video. Tom Clancy’s Jack Ryan starring John Krasinski and Homecoming starring Julia Roberts are currently the most binged-watched shows on Prime Video. Additionally, an excellent comedy I highly recommend is The Marvelous Mrs. Maisel. It is the show with the most entertainment industry awards produced by Prime Video.

With eight Emmy Awards, the series won more awards than any comedy series ever has for a single season, including “Outstanding Comedy Series.” While Amazon Prime Video does not have as much original content as Netflix (NFLX), it is rapidly growing its original content and that will help drive new memberships.

In the U.S., Amazon Prime members get a discount for shopping at Whole Foods, which Amazon acquired last year. Members also get access to Prime Music, where Justin Timberlake was the most streamed artist. Prime Twitch is a gaming service offered by Amazon Prime where members can play some of the most popular games in the world like League of Legends. Finally, Prime Reading makes many popular books available to members, including books from the Harry Potter collection.

Amazon Prime is offering more and more services that are integral to the lives of its members. The fee for Amazon Prime is very reasonable when one considers all of the benefits Amazon is offering. Because Amazon Prime is only available in 17 countries it has a lot of running room left. While the stock trades for a premium multiple to sales and earnings, it looks like it can grow into that premium over the next few years led by Amazon Prime. Investors should look to buy Amazon on any dips in this volatile stock market. Everyone should do their own due diligence before making any investment in Amazon or any other financial asset.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.