On the off chance you’re reading this and haven’t heard, today is Prime Day — a proverbial “Cyber Monday” event now put on by Amazon.com, Inc. (NASDAQ:AMZN) every July. The deals are numerous and generous, largely intended to draw attention to Amazon’s Prime service and enroll another swath of members.
And that’s an important detail current and would-be owners of AMZN stock should understand about Prime Day. It’s not really about making money.
Indeed, it’s unlikely that Amazon — already skating by on paper-thin margins — turns a profit on this ballyhooed day. That was never the point, though. Prime Day is first and foremost a publicity stunt, with the secondary goal of annoying its competitors.
Once again it’s achieved both goals.
Prime Day Is a Big Day
Don’t sweat the fact that AMZN stock is down today despite a record amount of business it’s drummed up on the now-annual event. That’s the norm. The company reported early on Tuesday that shopping at its site had reached record levels.
Though the e-commerce giant didn’t divulge any specifics as to what that meant, industry research outfit Internet Retailer forecasted this year’s Prime Day would pump up the company’s top line by 20% on a year-over-year basis.
That would put the day’s sales tally above $2 billion, on a global basis. Amazon’s home-assistant Echo has been the biggest seller thus far, priced at half its usual cost. The Echo was just one of thousands of deals too good to pass up, though … many of them for only a limited time.
One Huge Sales Pitch
As was noted, however, the jaw-dropping deals that induce revenue isn’t the ultimate goal. More than anything, the unspoken aim is to (1) inspire consumers to become paying Prime members, and (2) get the entire financial media industry to say the words “Amazon” and “Prime” for the better part of a three-day span. It’s a kind of advertising the company couldn’t afford to pay for even if it wanted to, given to the company for free.
Of the two, the real upside is the former — bringing new Prime members into the fold.
The numbers change over time, but as of the most recent look, Prime members spend around $1300 per year at Amazon.com, while non-Prime members only spend $700 per year at the site. To that end, Amazon is wise to perhaps even take a loss on the sale of some goods if it adds to its base of Prime users.
In fact, some number crunching suggests that the only reason Amazon is technically turning the thin profits it’s turning is only because of the estimated 85 million members who pay $99 per year for the service, or $9.99 per month.
Of course, if the model works …
Rattling Competitors’ Cages
Already backpedaling thanks to the advent of Amazon, a handful of retailers finally decided to fight back against Amazon’s third Prime Day. J C Penney Company Inc (NYSE:JCP) is hosting “Penney Palooza,” which drove 13% sales growth when it held the same event around Prime Day last year.
Department store chain Macy’s Inc (NYSE:M) was even more blatant with its coattail-riding, calling its sale event “Black Friday in July.” Its shtick includes free shipping on all online purchases today, with no minimum order size.
None of those other efforts can even come close to comparing to the buzz Amazon creates for itself on Prime Day, though. Indeed, the bulk of any sales bump those other retailers experience around this time every year may stem from the fact that Amazon is drawing more people online and putting them in a shopping mood.
Bottom Line on AMZN Stock
If you’re looking for this year’s Prime Day to provide a big earnings bump when Amazon reports its current-quarter results in late October, don’t — it doesn’t work like that.
The upside comes in the form of a slow, smoldering burn that ramps up gradually. A new batch of Prime members may sign up today, but it could take weeks, if not months, for them to reach the $1300/year average spend that the average Prime member ponies up every year.
All the same, Amazon.com has not only created a self-fulfilling buzz with its annual Prime Day event, it’s mastered the art of converting that buzz into new memberships.
Don’t worry about AMZN stock being down today. Prime Day is now a perpetual boon. It just takes a little while to reap the ultimate reward.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.