With Prime Price Increase, Amazon Flexes Its Profitability Muscle


The Labor Department said Thursday that U.S. initial jobless claims for the week ended March 8 fell by 9,000 to a three-month low of 315,000. Combine that with a better than expected 0.3% rise in retail sales in February and investors have all the reasons they need to push U.S. stocks higher this morning. The benchmark S&P 500 and the narrower Dow Jones Industrial Average are up 0.04 % and 0.10 %, respectively, at 10:15 a.m. EDT. Meanwhile, shares of Amazon.com are up 2.6%, after the company announced that it will raise the annual price of its Amazon Prime service by $20 to $99.

Like millions of other Amazon customers, I received an email this morning informing me that my Prime membership, which entitles me to two-day free shipping on a wide variety of items and access to a large library of streaming movies and television series, would renew at $99 per year instead of $79. The move had been telegraphed, as executives announced on a conference call in February that they were considering a price increase ranging from $20 to $40. Will I continue with the service when Dec. 31 rolls around? Almost certainly. What's the business impact of this price increase?

Amazon has always been coy about the number of Prime members. At the end of December, in an update on its holiday season, the company stated that "Amazon Prime membership continues to grow, and we now have tens of millions of members worldwide." It added that "more than one million customers around the world became new Prime members in the third week of December." Prior to that, Amazon's third-quarter earnings release stated that the company had "signed up millions of new Prime members" in the last 90 days. Those three data points are essentially all the e-commerce giant has ever disclosed regarding Prime membership.

Let's assume (conservatively) that the service has 23 million members, in which case the price hike represents an additional $460 million in annual revenue. (This assumes no cancellations, which is obviously unrealistic but probably a good first-order approximation.) At first glance, that looks like a rounding error for a company that took in nearly $75 billion in revenue last year. However, the revenue number is not the relevant figure here. Consider that those incremental $20 increases will fall largely to the bottom line - most of it is incremental profit. Thus, once you compare the $460 million to Amazon's $745 million in operating profit in 2013, you begin to see that the move has the potential to turbo-charge Amazon's earnings.

Some investors have questioned whether Amazon is stringing the market along, producing scant profit yet commanding a stratospheric price-to-earnings multiple. Today's price increase for Prime membership could be a key milestone in revealing the power -- and profit potential -- of Jeff Bezos' expansive vision for electronic commerce.

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The article With Prime Price Increase, Amazon Flexes Its Profitability Muscle originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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