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.

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

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