Amazon.com, Inc. (NASDAQ:AMZN) was all the rage in 2015, and with good reason. Shares of AMZN stock more than doubled on the year, and investors finally got some long-awaited positive details about its fast-growing cloud computing biz.
Specifically, Amazon stock holders learned that the Amazon Web Service arm is a roughly $8 billion-plus business annually and growing fast. And most importantly for a company that has struggled with profitability, AWS also offers pretty plush margins that have been driving the bottom line lately for AMZN stock — not just top-line growth.
But now that the AWS details have been revealed, investors are no longer in the cushy position of having new details to ooh and aah over. Amazon will get one more earnings report, and then it has to face the hard reality of year-0ver-year comparisons — where previously impressive figures in the ballpark of 80% growth may not be achievable again as momentum slows.
The market already seems hip to the fact that expectations are a bit high for Amazon and AWS in 2016. Shares have rolled back 15% year-to-date — twice as fast as the broader stock market’s declines to start the year.
But there are signs of hope even if Amazon Web Services can’t keep up the same pace of growth in the new year. And that hope lies mostly within Amazon Prime, the company’s subscription service that offers shipping perks and streaming video.
Amazon Prime as an Annuity Business
For starters, as a consumer it’s hard to not to like the perks of Prime if you’re a regular Amazon customer. Free two-day shipping, streaming movies and TV shows, ad-free music, unlimited photo storage and a library to borrow Kindle books are just a few of the perks.
At $99 a year, it’s an incredible value — and in full disclosure, I am a very satisfied Prime customer myself.
Amazon is committed to making this service a no-brainer for consumers everywhere by constantly added benefits. In fact, AMZN temporarily cut its Prime membership prices from $99 a year to $73 in celebration of its recent Golden Globe awards for Mozart in the Jungle, an original series produced for Prime viewers. That’s about $6 per month!
But while the cost to consumers is minimal, the benefits to Amazon are becoming quite material as membership soars.
Investment bank Cowen just issued a report that estimates more than one in three U.S. households has a Prime membership, with a total roll of 41 million members. That’s up 32% from a year ago.
Not only is that scale amazing and a key part of driving merchandise sales, but simple math tells you that at $99 per member, Amazon is raking in about $4 billion annually in subscription fees alone.
True, AMZN is a company that should rake in $130 billion in sales this fiscal year — and as mentioned before, Amazon Web Services is generating roughly twice the revenue of Prime and growing fast.
But for a company like Amazon, where investors seem to be constantly wondering about stability and profitability, a consistent cash flow from Prime Memberships is a big boost. Furthermore, the company raised prices significantly in 2014 from $79 to $99 — and there was nary a complaint anywhere, at least based on growth rates since then.
If Amazon does have the ability to raise prices another 10% or 20%, it would be a huge boon to shareholders — both in the near-term, and in regards to future cash flows.
Growth in AWS is crucial, and e-commerce margins remain in focus. As long as Amazon boasts a triple-digit price-to-earnings ratio, that will always be the case.
But Prime membership revenue is increasingly important as a sign of stability as Amazon matures and AMZN stock holders look to see what’s next from this tech giant.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
