Subscription Revenue Growth Is a Big Positive for Amazon Stock

AMZN's international business will also positively impact Amazon stock

Last month, my column on Amazon (NASDAQ:AMZN) stock was relatively bearish on the company’s medium-term outlook. I contended that the company’s margins were under pressure and could impact its earnings growth.

With AMZN stock trading at a forward price-earnings ratio of 65, the stock is likely to fall. It is worth noting that AMZN stock has already fallen 15% from its 52-week high of $2,035. Another 10% to 15% correction from its current levels would make AMZN stock attractive for long-term investors.

Amazon is Worth Accumulating on Corrections
Source: Jonathan Weiss /

However, there is little doubt in my mind that Amazon stock price will remain in a long-term uptrend. With its international expansion, its cloud business, and the inroads it’s making with brick-and-mortar stores, Amazon stock has several positive catalysts.

Subscription Services Revenue Growth

In this column, I will focus on some of the company’s long-term positive catalysts. One of the factors that will boost its cash flows in coming years is its subscription services revenue growth.

For the first three quarters of 2019, Amazon’s subscription services revenue rose 35% year-over-year to $13.9 billion.  The company’s Amazon Prime service is its main source of subscription revenue. But it also includes all of its other non-cloud subscription services.

For all of 2019, Amazon is likely to report subscription services revenue of about $18.5 billion. Assuming its subscription services revenue jumps an average of 30% in the next five years, Amazon is poised to report revenue of $68 billion from the segment over that period. As more consumers globally subscribe to Amazon Prime to benefit from its offers and superior service, the company can easily meet that 30% estimate.

For example, AMZN announced that its Amazon Fresh grocery service  will be free for Prime members. Amazon had previously charged a monthly fee of $14.99 for its grocery deliveries. The change provides more free benefits to Prime members and gives them more  incentive to shop from Amazon Fresh, boosting the company’s groceries business.

I am bullish on the company’s international markets. India holds immense potential for AMZN and AMZN stock. India has a population of 1.3 billion, and Amazon has a market share of 31% there. As a major player in the country’s e-commerce market, Amazon is positioned to benefit from rising e-commerce sales in India. Currently, Amazon offers Prime in India at an annual cost of $15. Even if the subscription fee remains low, India’s hundreds of millions of consumers can meaningfully boost Amazon’s subscription services revenue, providing a positive catalyst for AMZN stock.

Amazon’s International Operating Losses Narrow

In the first three quarters of 2017, Amazon’s reported operating losses from its international business of $2.1 billion. That figure fell to $1.5 billion in 2018 and to $1.1 billion this year.

While aggressively expanding overseas, Amazon focused on increasing its market share through intense marketing and offers. Its focus is gradually shifting to generating robust cash flows from international markets over the long-term.

I believe that its international sales will continue to grow, boosting its operating profits. A possible increase in its subscription service revenue could also raise its operating profits.  That would help improve its company-wide EBITDA margin and cash flows.

Of course, international expansion comes with foreign exchange risk as well as regulatory risks. As an example, the Indian government has questioned Amazon on what the government alleges are “predatory prices” and “deep discount sales.” Regulations can impact the company’s growth in markets like China and India, in particular.

My Final Thoughts on AMZN Stock

AMZN stock has been trading sideways, and I expect Amazon stock price to decline in the medium term. However, the stock is worth accumulating on any deep correction.

I believe that the company’s cash flows will continue to swell in the coming years, while its international markets will increasingly contribute to its cash flows. In addition, its healthy top-line growth will continue,  while its cloud business has a great deal of potential.

Its subscription services revenue will also grow at a healthy pace. Besides Amazon Prime, services like Kindle, Audible and Amazon music will contribute subscription revenue.

Overall, AMZN stock should be kept on investors’ radar and can be accumulated on pullbacks.

As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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