Throughout its history, Amazon (AMZN 4.11%) has possessed a certain ingenuity in finding new ways to grow. Just when the company seems to be maturing in one sector, it finds a new one to jump into. It's done this multiple times in retail, moving from books to media to electronics to pretty much everything under the sun. Beyond retail, it's forged into new segments like cloud computing, video streaming, and voice-activated technology, and it's leveraged its retail platform into valuable businesses like its Prime loyalty program, its third-party marketplace, and a burgeoning advertising business.
Since the company's early history, its quarterly revenue growth has cycled between 15% and 50%, depending on where it is in the growth cycles in the above businesses. Today, Amazon once again is coming to the end of one of those cycles, as the company is lapping its acquisition of Whole Foods in August 2017, which helped boost its revenue by as much as 43% in the first quarter. Analysts are calling for Amazon's revenue growth to slip to 30% for the quarter, which the company will report next week, and then settle at 22% through next year.
Lapping the Whole Foods acquisition is the most obvious catalyst for that slowdown, but there are other reasons why Amazon's days of 30% revenue growth will likely soon be over for good.
Amazon Prime is probably the most successful loyalty program in the history of retail. The company has gotten more than 100 million members around the world to pay $119 a year, or less sometimes, for a slew of benefits including free two-day shipping; access to streaming video, music and the Kindle Owners Lending Library; and discounts at Whole Foods. However, the free two-day shipping is the real key here, as that has locked consumers into its e-commerce ecosystem, encouraging them to spend significantly more than non-Prime members. According to Consumer Intelligence Research Partners (CIRP), Prime members in the U.S. spend an average of $1,400 a year compared with just $600 for non-Prime Amazon shoppers.
However, CIRP recently found that Amazon Prime growth in the U.S. appears to be hitting a saturation point. The research firm found that Prime membership grew just 8% over the last year, the slowest growth in the service since the research firm began tracking it in 2012. CIRP concluded that early adopters and other consumers who were likely to join Prime have already done so, meaning it will get more difficult to attract new members from here on. Meanwhile, competitors like Walmart (WMT -11.38%) have followed suit, as that retailer now offers free two-day shipping for orders of $35 and above without a membership, likely appealing to some would-be Prime members.
Though Amazon does not break out Prime figures, it's logical that the service has driven significant revenue growth, as membership has grown quickly and CIRP's findings show that members spend significantly more than non-Prime members. With Prime membership growth now flattening, Amazon is losing a key revenue growth driver.
The law of large numbers
Amazon is set to bring in around $234 billion in revenue this year, making it the fifth-biggest company by revenue in the U.S. behind Walmart, ExxonMobil, Apple, and Berkshire Hathaway. In another year or two, Amazon could become No. 2. However, the bigger a company gets, the harder it is to grow, so says the law of large numbers. There are two reasons why. First, there are only so many trillions of dollars of sales to be had in the world and a company can outgrow the world, and the second one is just math. In order to grow by, say, 20% annually, Amazon has to add a higher number of sales each year, and growing revenue by $40 billion a year isn't so easy.
Furthermore, the company already controls half of e-commerce sales in the U.S., and overall domestic e-commerce has been growing by about 15% annually, meaning that as Amazon gets bigger, it should see its e-commerce growth move closer to that 15% mark, as it will become more difficult for it to outgrow that segment, especially with Prime membership growth moderating.
To be clear, Amazon's revenue growth isn't about to flatline, as analysts still see it growing by 22% next year and it could maintain that rate after that. But barring another sizable acquisition like Whole Foods, the company is unlikely to see revenue growth in the 30% or 40% range that it's put up in recent quarters. While 20% revenue growth is still stellar for a company of Amazon's size, that would actually put it behind all of its FANG peers -- Facebook, Netflix, and Alphabet. That shows the kind of huge growth that big tech companies have been delivering.
The transition to profitability
Amazon's slowing revenue growth isn't necessarily a cause for concern for investors. As I've argued before, Amazon is finally leveraging the power of its e-commerce platform with businesses like third-party seller services such as its marketplace and fulfillment, advertising, and Amazon Web Services (its cloud computing division). In some ways, the core e-commerce business has historically functioned like a loss leader, building customer trust and an ecosystem that has given Amazon massive market power and allowed it to layer on more profitable businesses.
As a result, its bottom line is surging. Through the first half of the year, earnings per share grew more than fourfold from $1.87 to $8.34. That strong growth is likely to continue as the company continues to flex its market power. Analysts see EPS growing by around 50% in 2019.
After years of focusing on sales and market share, Amazon is finally delivering sizable profits. That doesn't mean the company is done expanding into new businesses -- it's shown interest in healthcare with its recent acquisition of PillPack and convenience stores with big plans to add more cashier-less Go stores. However, at its current size and with Prime past its growth peak, Amazon's fastest growth will come on the bottom line rather than the top.