What does Prime price hike mean for Amazon shares?

This is a company that does $74 billion in annual sales. An extra hundred million bucks or so -- or a similar loss if the move backfires -- won't alter the course of its stock.

By InvestorPlace Mar 13, 2014 11:34AM

UPS worker with Amazon packagesBy Jeff Reeves


Amazon (AMZN) announced Thursday it would increase the price of its premium Amazon Prime service from $79 to $99 annually.


It's the first price increase since the service debuted almost a decade ago, and will be charged going forward for new customers and for renewals of existing customers alike.


So what does the Amazon Prime price hike mean for shares of AMZN?


To me, not much.


For starters, it's just $20 a year. I suppose the 25 percent Amazon Prime price increase is substantive, but spread across the year, it equates to a little more than a nickel per day, or roughly $1.67 a month.


Secondly, the pricing move puts Amazon on par with Netflix (NFLX) and Hulu Plus in regards to pricing for streaming video. Both Netflix and Hulu charge $7.99 per month, which adds up to $95.88 a year. The monthly installments instead of a one-time charge could be more attractive, given that it doesn't "feel" as costly to buy a Hulu Plus or Netflix streaming video subscription vs. Amazon Prime, and because of added flexibility where subscribers can cancel at any time and simply stop paying the monthly fee. But those are hardly slam-dunk advantages.

Also, while the casual user might not be over the moon about Amazon increasing prices, there are a host of additional benefits to power users, including a Kindle lending library and free two-day shipping.


All in all, seems like Amazon Prime is still a pretty good deal  . . . even at $99.


What About AMZN?

Even a modest $20 increase to Prime membership prices can add up to big numbers. Amazon Prime boasts "tens of millions" of members, meaning hundreds of millions of dollars in extra revenue from this move alone.


That's good . . . however, it's important to remember that in January, Amazon reported growing earnings but missed the mark on both revenue and profit expectations.


So the real question is whether the Prime cash will be enough to satisfy Wall Street, or whether the core e-commerce business of Amazon will remain most important to shareholders.


To me, it's the latter -- and that's reason to be bullish about AMZN stock.


Amazon.com has been resilient over the past five years. Shares have always marched steadily higher even after short-term troubles, with Amazon stock up 500 percent or so since early 2009. That's in large part because of continued revenue growth even across a bad consumer spending environment and a period when conventional retailers have been underperforming big-time.


Consider that Amazon just put up 20 percent revenue growth in the fourth quarter, while many retailers -- from Walmart (WMT) to Target (TGT) to Best Buy (BBY) -- have struggled mightily to grow their top line. Amazon's numbers missed expectations, true, but that kind of growth isn't happening anywhere else in retail.


The bears will point to the Netflix Qwikster debacle as proof of what can happen when a company messes with a cash-cow subscription. However, that mess was much more than just meddling with prices; Netflix was planning on breaking out its DVD business, with a different user interface, and did so ham-handedly through a non-apology from its CEO Reed Hastings that ticked off subscribers.


This is not the same. Amazon telegraphed its intentions for a price increase months ago, and isn't changing any of the core features.


Of course, there are always valuation concerns. The premium that investors have been paying for Amazon is a premium for growth, and the forward price-to-earnings ratio of 88 or so continues to turn heads.


The only real concern I see is a philosophical one. After all, Amazon has made its growth dependent on a race to the bottom in pricing, making up for low margins with big scale. Is this price hike an admission that that strategy might not be working anymore? Perhaps an admission that Amazon CEO Jeff Bezos is looking to harvest from the massive Internet ecosystem he has built, rather than keep it growing?


Time will tell. But if you own AMZN stock or are thinking of buying now, I wouldn't overestimate the significance of this Prime price increase. The bottom line is that Amazon is one of the few retail options that has seen growth, and its share performance over the last few years should speak for itself. And hard comparisons to Netflix and Qwikster ignore not only how well Amazon has handled this move, but how broad its business is beyond Prime.


After all, this is a company that does $74 billion in annual sales. An extra hundred million bucks or so -- or the loss of a few hundred million bucks if this Prime move fails -- won't significantly alter the course of its stock.


More From InvestorPlace

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

3Comments
avatar
Its a healthy increase all at one time but its also way overdue.

Frequent Amazon shoppers will still see benefit in it even at the increased cost

I dont think its going to have a major effect on the majority of users. And the renewing members will be over the course of the year so it wont happen all at once.

Mar 13, 2014 1:47PM
avatar
Another $20 - I will cancel - $99 is really $100 and I'm tried of everyone pulling it's just another $$$ per year.  
Mar 13, 2014 2:52PM
avatar
Depending on how much you use the service it can be a great or terrible deal. I personally spends thousands a year so it is a great deal for me
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