Let’s be clear; I own Amazon shares and can’t see getting rid of them anytime soon. I consider it an amazing company for so many reasons and Jeff Bezos has won my admiration for being one of the biggest risk-takers (Elon Musk is up there too) in the history of business.
We subscribe to Amazon Prime in my house. And unless something drastic occurs, it’s a lock like the sun coming up that we will be Prime members for the rest of my days. There’s simply too much value there for me to even consider not renewing. Three months of toilet paper shipping pays for the entire annual subscription, and the rest is just gravy. Two-day shipping, the Kindle lending library, free video streaming, it all adds up to a lot of value. Consumers can chalk it up as a huge win. But is it a win for Amazon? Some say yes; some say no. I say absolutely.
Here’s the thing: when you find a great business that provides a valuable service, that’s lovely. When that business can charge an annual membership fee which provides so much value that customers can’t justify not renewing, that’s living the dream. There aren’t many businesses like that out there. Costco is one of them and as time goes on, Costco’s focus on low prices and a great experience for their members has helped them ring up close to 27 million Gold Star memberships. And I think this is a nice comparable to Amazon Prime’s opportunity.
The Costco Gold Star is a $55 annual membership fee. As time goes on and families see the value in the membership, it becomes simply a cost of living. It’s a trivial amount when compared to the value consumers feel they are getting on an annual basis. And that’s why when Costco initiated its $5 price increase last year, memberships weren't impacted at all. Who cares about the extra $5? The value proposition is huge. Prime is very much the same way. This is just me personally, but Amazon could double the cost of Prime and I would still happily pay it because it still works out in our favor; the math is there along with all the extras that come with it. But we know Bezos more than likely isn’t going to do that. Heck I’d be shocked if he raised the price $5. That’s not the strategy…for now. But it’s clear to see that what he’s doing is creating compelling value-adds to Prime which make the 2-day shipping seem truly free. And all the research shows that free shipping is consistently one of, if not THE biggest considerations among online shoppers.
Morningstar estimates that Amazon has about 10 million Prime members. Not a bad start. And I think that Costco’s 27 million Gold Star memberships gives us an idea of the potential that Prime could have in store; particularly if management really starts pushing it. But they probably won’t have to (at least not much). That’s what the Kindle Fire is for. Check this graph out below, courtesy of Morningstar. Do you think Prime can reach 25 million members by 2017? I certainly think it’s reasonable to believe. And that would be a major cash cow for the company and investors:
There is the justifiable observation that Bezos has too many irons in the fire which is diverting his attention from what really matters. I choose to look at this a little bit differently (shocker). Amazon’s corporate mission is stated thusly: “We seek to be Earth’s most customer-centric company for four primary customer sets: consumers, sellers, enterprises, and content creators.” To me, Amazon and Bezos really only have one iron in the fire and that’s it right there. To be the most customer-centric company on the face of the Earth. Period. Full stop. And in order to do this their strategy is to offer up all of these different products and services that, in the end, help make our lives easier and more enjoyable than ever before.
Whether you believe in Amazon as an investment is totally up to you. And I'm also fully aware that because management holds a lot of their numbers close to the vest, these Prime assumptions may very well be robust. But in my opinion you should not be looking at this company through a traditional analyst’s lens of price-to-earnings or net losses. Amazon demands that you take a big-picture approach and look at what the company is doing to shape our world. Look at this company from the perspective of its competitive advantage(s) and its tenacious founder/leader. I cannot recommend highly enough taking a look at Jeff Bezos’ 2012 annual letter to shareholders. You can find the history of them all right here. It’s a short and sweet read that will provide you the best insight as to how he thinks and what he’s trying to do. From there it all just boils down to whether you choose to buy it or not. I choose to.