Jeff Bezos is making another move to own your home and investors want to know what this means for Amazon.com, Inc. (NASDAQ:AMZN) and Amazon stock.
Since the news surfaced Feb. 27 that the Seattle company was indeed buying Ring, a company that specializes in doorbells with cameras that can be remotely viewed from your smartphone, there has been very little movement in the Amazon stock price, suggesting the latest move by the world’s richest person is going to take some time to play out.
InvestorPlace’s Brad Moon did a good job Feb. 28 highlighting the key points why Amazon is doling out more than $1 billion to buy Ring.
The most obvious being that Amazon wants to own your home, figuratively of course, providing consumers with an Amazon-controlled smart home.
“Along with Cloud Cams, Fire TVs and Echo smart speakers, now Amazon has a doorbell cam that lets users interact remotely with visitors,” Moon stated. “The more comprehensive an Amazon smart home can be, the more likely consumers are to buy into it instead of putting together a patchwork system from multiple vendors.”
The Possibilities Are Endless
Imagine that you’re a fly on the wall in an Amazon board meeting and Bezos suggests that the company’s reason for being is to own the American home from soup to nuts.
The self-help gurus always say that when you have a specific purpose, every decision becomes easier to make because you know when to say yes and no to possible opportunities, experiences, etc.
Apply this to Amazon and the Ring purchase becomes a no-brainer.
Is this $1 billion acquisition going to help us get closer to our purpose of owning the American home? Of course, it is. Write a check.
Moon’s an electronics specialist. So, his perspective on the deal comes from that viewpoint, but allow yourself to move beyond technology and there are so many things Amazon can do to get closer to its purpose.
90 Million Strong
Amazon Prime has approximately 90 million members in the U.S. Each of those members spends $1,300 annually, almost double what non-members spend.
The monthly rate for a Prime membership just went up by two bucks to $12.99; if you pay for an entire year, it stays the same at $99.
Let’s assume that 75% (67.5 million) of Prime members pay for an entire year and 25% (22.5 million) go month to month. That’s $10.2 billion in annual revenue from the membership alone.
Now, take 90 million Prime members and 90 million non-members and calculate the annual revenue from each cohort — $87.5 billion for Prime and $15.8 billion for non-prime — and it becomes apparent who Amazon is courting.
All told, Prime members are worth $94.2 billion each year, while non-members ring in at $19.3 billion or one-fifth the value as a customer.
I’m not suggesting that it mistreat non-members or ignore them, but it’s in the best interest of AMZN and owners of Amazon stock for the company to focus on providing as many products and services to its Prime members as possible.
That’s Where the Home Comes In
I recently moved from Toronto to Halifax. Among the countless number of things I needed to get done before the actual move date was to find auto and property insurance.
I’m a member of both Prime and Costco Wholesale Corporation (NASDAQ:COST).
I was always getting emails from Costco advertising its insurance services that are available to members. The move finally provided me with the motivation to act; it saved me a considerable amount of money from my previous insurance carrier.
Costco’s business model allows it to survive on razor-thin margins because of its annual membership.
Through Prime, Amazon could do the same.
Instead of offering just speakers, video streaming, doorbell cameras and all the other things it sells online, why not provide everything a homeowner (and renter) could need to keep the household functioning.
Amazon could provide insurance, mortgages, wealth management, travel, legal advice, healthcare insurance (it’s on that), actual healthcare, the list goes on.
Bottom Line on Amazon Stock
Take a business like Roku Inc (NASDAQ:ROKU).
Its growth strategy is to grow the number of users it has and the number of hours its users’ stream to increase the rates it can charge advertisers. Eventually, economies of scale will turn it profitable.
In Amazon’s case, it increases the number of Prime members and the amount those members spend annually by providing everything you need to run your home and life.
Over time, revenues will exponentially climb, and with it, the price of Amazon stock.
Buying Ring is all about capturing additional market share of the home. Amazon is only just beginning.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.