Retail juggernaut Amazon.com, Inc. (NASDAQ:AMZN) and its Amazon Prime service have taken over the industry and threatened to put several brick-and-mortar shops out of business over the past decade. But despite the firm’s dominance, investors are often wary of AMZN stock because the company’s erratic spending patterns make quarterly results uncertain and weigh on the firm’s profits.
Amazon’s most recent results show that the company was pouring cash into its retail arm ahead of the holidays which spooked some investors and sent the stock down nearly 6%.
While a great deal of spending does raise red flags, in Amazon’s case the spending is likely to promote growth, especially considering that the firm’s investments are closely tied to Amazon Prime offerings.
AMZN opened 23 new warehouses over the past few months and increased its workforce by 38%, both of which will help the company offer faster shipping options — something Amazon Prime members pay a premium for. The company also upped its spending on TV and movie content in an effort to make Prime membership more comparable to streaming services like those provided by Netflix, Inc. (NASDAQ:NFLX).
Why Does Amazon Prime Matter?
Amazon Prime is a huge part of the company’s growth potential in the retail industry. The company offers a $99 per-year subscription that provides customers with perks like faster shipping and free video streaming.
By making Amazon Prime a popular choice, the firm is able to generate a continuous revenue stream with very few marketing costs. The membership also keeps people buying from AMZN even when there’s a cheaper option out there. As competition in the e-commerce space grows, Amazon Prime offers a value proposition that may persuade customers to use AMZN for reasons other than price. Same-day shipping and free returns with courier pickups make buying on Amazon one of the simplest ways to shop.
However, as more companies latch on to the idea of a subscription-based service that offers added benefits, AMZN stock needs to stay ahead of the curve by giving its Amazon Prime members perks that make its service the most valuable. AMZN has been doing that in a big way recently by including even more services aimed at enticing new members and getting existing members to renew.
Seeing as though Amazon initially made its name as a retailer by selling books online, many have been wondering when the company will introduce added reading benefits for Amazon Prime members. Earlier this month, AMZN did just that by rolling out Prime Reading — a catalog of books, magazines and comics that kindle users can read without limits.
Amazon already offers Prime members a library-like service in which they can borrow and return certain titles, but Prime Reading has no restrictions, meaning members can have as many titles as they want with no time limit. This addition to Amazon Prime memberships is a key way that the firm can leverage its unique offerings to make a Prime membership more attractive.
Perhaps the most intriguing thing that AMZN has done for Prime members to date is the introduction of the Dash button. Customers can order a button to set up in their home that will automatically order a specific item when pressed. The Dash button has been heavily marketed for household essentials like laundry detergent and garbage bags which are often forgotten until they are completely depleted, but Amazon offers buttons for everything from Pop-Tarts to pet-care items.
The company has seen the dash button’s popularity soar among Prime members this year — a good sign for AMZN stock. Not only does the Dash button give Amazon Prime users a positive customer experience, but it ensures that they shift even more of their shopping to Amazon.
The Bottom Line on AMZN Stock
Amazon’s spending is an important part of the company’s growth story. The firm has proven that it is able to drive customer engagement and deliver services that people value, which will support Prime renewals. AMZN has been working to make its Prime membership absolutely irresistible, and so far it appears that the company is on the right track.
As of this writing, Laura Hoy was long NFLX.
