The number of Prime members in the U.S. may have declined in 2022.
After growing rapidly in 2020 and 2021, Amazon (AMZN +0.63%) ended 2022 with 2 million fewer Prime members, according to an estimate from Consumer Intelligence Research Partners, or CIRP. Amazon says the estimate is not accurate and Prime continues to grow.
Still, the estimates indicate Prime membership in the United States may be nearly saturated even though Amazon is spending heavily to provide faster shipping on more items and more video content for Prime members.
If Prime membership isn't growing like it was in 2020 and 2021, should investors be worried the company is spending too much to cater to its subscribers?
A look at Amazon's spending
Two main factors impact the appeal of a Prime membership -- streaming video and fast shipping -- and Amazon has been spending heavily on both.
Amazon's content expense increased by $2 billion through the first nine months of 2022, up over 20% year over year. Keep in mind that only includes a portion of The Lord of the Rings: The Rings of Power series it debuted in September and Thursday Night Football, which premiered that same month. Both cost Amazon hundreds of millions of dollars to obtain the rights to and produce. So investors should expect a substantial increase in content expenses in the fourth quarter.
To its credit, the increase in content spending appears to be paying off. Prime Video had more paid subscribers watching its service than any other streaming service in 2022, according to a report from Parks Associates. And while big events like Thursday Night Football appear to be attracting subscribers, it might not be enough to offset shoppers leaving the program.
Meanwhile, Amazon may have overbuilt its fulfillment network, and it's paying for it now. Cash capital expenditures in 2021 totaled $55.4 billion. That's up from $12.7 billion in 2019. Note that a large portion of that spending goes toward technology infrastructure to support Amazon's cloud computing business, Amazon Web Services, which is still growing quickly.
While cash spending growth moderated in 2022, it's still sitting above 2021 levels through the first nine months of the year. However, management notes it plans for "decreased spending on our fulfillment network in 2022."
The massive spending on the fulfillment network supported the growth Amazon saw in demand amid the pandemic. It's also going toward fulfilling more orders within one day, offering better convenience for Prime members. Amazon's now paring back on new fulfillment centers, being selective where it does open new ones, and looking for ways to monetize its existing real estate.
NASDAQ: AMZN
Key Data Points
Did Amazon overspend?
After growing U.S. membership by approximately 50% -- off of a substantial base -- from the end of 2019 to the end of 2021, a slowdown in growth isn't too surprising.
Two factors led to a significant slowdown in online retail. First, customers became increasingly comfortable with in-store shopping over the last 18 months after the widespread rollout of COVID-19 vaccines. Second, economic uncertainty and inflation led to a shift in consumer spending from discretionary items to groceries and essentials. Since Amazon specializes in online discretionary purchases, it made a Prime membership seem like much less of a necessity.
But Amazon's spending supports the long-term vision for Prime. Big-name content works to attract subscribers through its video service, and the convenience of one-day or same-day delivery can keep them around and get them to spend more on Amazon.
While a step back in Amazon's Prime membership is far from ideal, it still counts tens of millions of households as Prime members. That still provides a massive network advantage, attracting new merchants and supporting its fulfillment network, ultimately creating a virtuous cycle. Just because the cycle slowed a bit in 2022 after really fast growth in 2020 and 2021 doesn't mean Amazon's overspending.
With the stock trading at a relative bargain valuation compared to its historical levels, Amazon is still a buy at today's price.
