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How Amazon Can Profit Another $3 billion In 2022

Amazon stock has been suffering from bearish sentiment since Q2 earnings season. Today, the Amazon Maven presents one catalyst that could help to push shares back towards all-time highs.

JPMorgan is bullish on Amazon stock  (AMZN) - Get Amazon.com, Inc. Report. Last week, the Amazon Maven presented five-star rated analyst Doug Anmuth’s thesis on the Seattle-based cloud and e-commerce behemoth. One of the key reasons for the analyst’s optimism was the possibility of a price hike in Prime subscription in 2022.

Today, we go deeper into Mr. Anmuth’s argument. What could a Prime price hike represent to Amazon’s financial results? Could Prime members cancel their subscriptions in the face of a price bump? If so, is the potential churn risk worth the increase in membership cost?

Figure 1: Amazon's headquarters in Seattle, WA.

Figure 1: Amazon's headquarters in Seattle, WA.

(Read more from the Amazon Maven: AMZN Premarket: Can Amazon Stock Finally Build Momentum?)

Price does not seem to be an issue

Prime service was launched in 2005 at a cost of $79 per year. In 2014, Amazon increased the price to $99. In 2018, the subscription reached its actual price of $119 – another $20 bump. If Amazon intends to form a four-year pattern in price changes, Mr. Amnouth’s expectations that 2022 will see $20 added to the Prime membership price seem reasonable.

From a churn risk perspective, Amazon might not have much to fear. Prime members seem aware of the value that they receive vis-à-vis the price that they pay. Amazon Prime started solely as a free two-day shipping service in the US on eligible purchases. Today, members have access to music and movie streaming, one-day delivery, credit card rewards and more.

The graph below shows that, so far, price increases have not threatened Prime growth trajectory at all.

Figure 2: Number of subscribers vs. price.

Figure 2: Number of subscribers vs. price.

(Read more from the Amazon Maven: JPMorgan On Amazon Stock: 29% Upside Potential)

Revenues without cost

Among over 200 million Prime members worldwide, approximately 150 million are located in the United States. If Amazon raises the price for Prime services only for the US households, the extra $20 dollar in annual fee would represent an increase of $3 billion in revenues without direct costs involved. Of course, Amazon spends quite a bit to service its Prime member base, but the expenditures are unrelated to how much the company charges for the service.

For perspective, unlike most of the $386 billion in revenues that Amazon booked in 2020, the extra $3 billion in Prime revenues would flow cleanly into Amazon’s operating income, which was nearly $23 billion last year. Therefore, the additional $3 billion could represent an increase of roughly 15% in pre-tax profits next year.

A profit-making machine: our take

A report from eMarketer estimates that US Prime households will jump to 68% in 2025, from a bit more than 63% in 2021. We believe that this humongous customer base is likely quite price-sensitive when it comes to the products that they buy; but not much so when it comes to how much they are willing to pay for a valuable service like Amazon’s Prime.

With little opportunity costs, we think that Amazon has much to gain from the potential price hike in Prime — and so do Amazon stock investors. This could be one catalyst that helps to push AMZN higher from current levels, after shares dipped into correction territory as recently as early October.

Twitter speaks

Amazon bulls: do you think that a potential increase in Prime membership price next year would help, hurt, or do nothing to AMZN stock?

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)