Amazon Stock Will Rise Substantially From Amazon’s Prime and Ad Growth

Two weeks ago I wrote that Amazon (NASDAQ:AMZN) stock was worth 43% more at $4,634.26 per share. At the time, AMZN stock was trading at $3,224. But on Friday, Feb. 4, the stock rose 13.5% to $3,152.79. So the stock made a major boomerang but ended up just about where it was two weeks ago.

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So far this year the stock is still down 3.17% year-to-date (YTD), even though it rose 13.5% on Feb. 4.

The good news is that since then Amazon reported stellar earnings on Feb. 3. That makes my projection for a 43% higher price target more salient now than before. Let’s look at this further.

Amazon’s Earnings and Prime Increases

Amazon reported its fourth-quarter net income rose to $14.3 billion from $7.2 billion a year ago. Moreover, net sales increased 9% year-over-year to $137.4 billion. Its Amazon Web Services (AWS) cloud server business was strong and its ad revenue was also strong.

But more importantly, Amazon said it was going to increase its prices for its Prime members. The annual fee rises 16.8% from $119 to $139 and the monthly fee rises 15.4% from 12.99 to $14.99. This shows the company still has a good deal of pricing power.

The price change will go into effect on Feb. 18, 2022. For current Prime members, the new price will apply after March 25, 2022, on the date of their next renewal.

Amazon has more than 200 million prime members. Amazon does not break out its Prime revenue, but we can estimate it. Its subscription revenue in the trailing 12 months (TTM) was $31.768 billion but this includes digital video, audiobook, digital music, e-book, and other non-AWS subscription services.

If the average membership is $143.58 its revenue (assuming one-third annual and two-thirds monthly) works out to $28.7 billion annually. Assuming the average membership increase is 15.9%, the revenue gains could bring in more than $4.55 billion annually (i.e., 0.159 x $28.7b).

That could also help Amazon pull into a higher profitability category and potentially become free cash flow (FCF) positive. Those price increases go straight to the bottom line in terms of free cash flow, since there is no cost associated with them.

Free Cash Flow

Last quarter, Amazon’s FCF decreased to an outflow of $9.1 billion for the trailing twelve months (TTM). This compared to a positive FCF of $31 billion for the TTM ended Dec. 31, 2020. So the price increases could eliminate at least half of the FCF outflows in the TTM going forward.

This is a rough estimate since the price gains could end up motivating some subscribers to Prime to leave. However, new subscribers could come in as well.

Amazon continues to “invest heavily” in TV and movies. It just bought a major studio, MGM, for $8.5 billion. Its “investments” in Prime entertainment are costing much more, as it has to compete with more streaming companies.

As a result, the price increases will allow the company to not only increase its investments but also move towards becoming FCF positive or less FCF negative. That is exactly what shareholders want to see and likely why the stock rose so much on Friday, Feb. 4.

What to Do

Analysts were very positive on AMZN stock, according to Barron’s magazine. This latest earnings report detailed its advertising revenue for the first time, Russ Mould, an analyst at broker AJ Bell told Barron’s.

Its ad revenues were $31.2 billion in the TTM, rising 32%. This included $9.7 billion in the fourth quarter alone, a YoY gain of 33%.

Digital ad sales are highly profitable to most companies, especially Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). On Feb. 1, Alphabet announced that its Q4 ad sales of $75.3 billion produced $18.55 billion in free cash flow. That works out to an FCF margin of 24.6%.

This implies that if Amazon has a similar FCF margin with its $31 billion in online ad sales (which are mostly from search engine inquiries like at Google), it could be making $7.6 billion in FCF from this. In addition, in two years, this could be 77% higher or another $5.8 billion on top of th$7.6 billion. This will help bring Amazon FCF positive as well.

This means that my original price target is probably still good. As I wrote last time, look for AMZN stock to rise 46.9% to $4,634 per share within the next two years or earlier.

On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Mark Hake writes about personal finance on and runs the Total Yield Value Guide which you can review here.

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