Amazon Is Primed for Earnings Growth

After years of grabbing market share, Amazon has huge potential to grow earnings per share. The company's recent price hikes will help it grow EPS by controlling costs.

Mar 25, 2014 at 8:00PM

Amazon's (NASDAQ:AMZN) core focus has always been to grab market share and provide great value to customers at a great price. But, after years of focusing on only top-line revenue growth, the company is now finally leaning toward earnings growth. The recent price hike of Amazon Prime, and the uptick in the minimum threshold for free shipping, represent its desire to finally ramp up operating earnings.

Price hikes
After years of grabbing market share in the e-commerce space, Amazon is now setting its sights on profitability and free cash flow growth. The company's recent pricing actions will go a long way in helping to ramp up earnings per share. 

In late 2013, the company hiked the minimum threshold for free regular shipping from $25 to $35. Recently, Amazon also increased the price of Prime from $79 per year to $99 per year. Since Amazon earns most of its profit by selling in large volume, these recent pricing actions will go a long way in enabling the company to control shipping costs, which have been enormous in the last couple of years. 

As a percentage of revenue, Amazon's shipping costs have been constant over the last two years at 4.7%, and the recent price hike should help the company keep costs reasonably low. With more than 20 million Prime members, the company will be able to earn more than $400 million in incremental revenue from the Prime price increase. 

Additionally, this price increase will enable the company to invest more heavily in Prime Video. Amazon's lead competitor in the online video space, Netflix (NASDAQ:NFLX), has been rapidly adding subscribers and now has more than 44 million users. Netflix has been able to build such a large customer base by investing heavily in high-quality original shows, increasing the moat of its business. Similarly, Amazon should be able to grow its Prime subscriber base by adding more high-quality video content. 

Growth in earnings
For a company with $74 billion in annual sales, Amazon is still growing at a much higher pace relative to its e-commerce peers. In 2013, Amazon's top line grew at 22%, twice as fast as the growth of the overall e-commerce market. The company is focused on growing its higher-margin businesses, which justifies its pricey stock.

The company's third-party unit sales saw same-store-sales growth of 23%, while eBay's (NASDAQ:EBAY) growth stood at 15% in the last month, according to ChannelAdvisor. eBay's same-store-sales growth was the highest since September 2013, and the company should continue to do well in this category. The marketplaces business is eBay's bread-and-butter, and is increasingly becoming a larger portion of Amazon. Over time, this will aid Amazon in growing its gross margins from its 2013 levels of 27.2%. 

Amazon's operating income margin is still very slim at just 1%, but should expand once the company's higher-margin businesses (including third-party business and Amazon Web Services) make up a larger portion of the revenue pie. As Amazon's heavy investment cycle comes to an end, EPS should see healthy growth in 2014 and beyond. Pricing actions, like the increase in minimum threshold for free shipping and the Prime rate increase, should substantially aid this endeavor.  

Going forward
The company's moat in most of its business categories is gigantic. It is growing at a faster pace relative to other e-commerce players and will continue to gain market share at the expense of numerous brick-and-mortar retailers. The company's long-term growth potential is well in place, as the company is a relatively small player in numerous emerging markets including Brazil, China, and India. Earnings growth will enable the company to reinvest more into its business and gain more market share in the long-run.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 



Ishfaque Faruk owns shares of Netflix. The Motley Fool recommends, eBay, and Netflix. The Motley Fool owns shares of, eBay, and Netflix. 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.

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.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information