With Prime Price Increase, Amazon Flexes Its Profitability Muscle

A $20 increase may not seem like much, but it could demonstrate the power of Amazon's model.

Mar 13, 2014 at 10:15AM

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 (DJINDICES:^DJI) are up 0.04 % and 0.10 %, respectively, at 10:15 a.m. EDT. Meanwhile, shares of Amazon.com (NASDAQ:AMZN) 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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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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