(Bloomberg Gadfly)—Amazon is letting investors in on (some of) the ingredients in its secret sauce.
For the first time, Amazon.com Inc. has released figures detailing how much money it brings in through its Prime membership program and other subscription services.
Although the disclosure made up just a few paragraphs in a 77-page document filed late Friday, breaking out these numbers is a big deal for investors searching for clarity on whether the famously secretive company can increase profits over time. Amazon is No. 1 in the Internet Retailer 2016 Top 500 Guide. The new data about one of Amazon’s most important features should embolden Amazon bulls, some of whom see the stock rising 50% in the next 12 months.
The last time Amazon broke out the financial details of a major revenue source—Amazon Web Services—it sent the company’s stock soaring. The April 2015 disclosure outlined how big and profitable its cloud-services business was, completely changing the way Amazon was valued by analysts and investors, many of whom weren’t convinced Amazon would ever post a profit. Shares in the tech giant have more than doubled since then.
The AWS analogy isn’t exactly apples-to-apples. The biggest revelation of the disclosure wasn’t revenue; Amazon was already breaking out an “other” products line, which investors used as a proxy for AWS sales. Rather, it was the scale of operating profit delivered by the cloud-computing business that blew investors away.
The cloud unit turns about 20 to 25 cents of each dollar of revenue into operating profit, including the cost of stock compensation. On the same basis, Amazon’s North America e-commerce business has 2% to 3% operating profit margins. The realization that AWS was a high-margin and fast-growing business made investors believe Amazon would be a far more profitable and more valuable company in the future.
In its latest annual filing, Amazon only disclosed that it brought in $6.4 billion from Amazon Prime and other subscription services such as e-books and videos. Assuming about 90% of Amazon’s subscription revenue comes from the $99 annual membership fee, Morgan Stanley estimates there are about 65 million paying Prime members, which is the same number Consumer Intelligence Research Partners estimated in a September report.
Net sales from Amazon Prime and other subscriptions are still growing by more than 40% annually, a dozen years after Amazon launched the membership program. That’s a good sign for Amazon’s future prospects, especially considering the majority of Prime members are still in the U.S. And some analysts estimate Prime subscribers buy twice as much on Amazon as people who aren’t part of the shopping club.
But it’s still unclear how profitable the Prime program is today.
It might not matter. Unlike the AWS profit disclosures, lifting the veil on Prime revenue won’t immediately change perceptions of Amazon as a company with uncertain profit potential. But the fresh disclosure does make it easier to imagine Amazon’s membership fees curing one of the company’s biggest headaches: its growing tab for packing and shipping its merchandise.
Investors can think of it like the business model at Costco Wholesale Corp. (No. 8 in the Top 500), which offers such low prices to its members that it makes little profit on what it sells. It makes up for that in the yearly fees it charges customers. This shows up in Costco’s revenue from memberships, which last year was $2.6 billion, or nearly equal to the company’s net income.
At Amazon, the symbiotic relationship between shipping costs and Prime members goes even further. Arguably, the more Prime members Amazon attracts, the more efficient its shipping network tends to be, because it’s able to deliver more items to more people on the same shipping routes using the same trucks (or drones?) it was using at lower volumes. In essence, additional density drives overall costs down.
Subscription sales haven’t canceled out shipping costs yet. But Amazon may have just given us a way to envision that future.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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