Why Wall Street Loves Amazon Prime

NEW YORK (TheStreet) -- Though some consumers may not be happy about Amazon (AMZN) raising the cost of its Prime shipping service, Wall Street is loving it.

Pacific Crest Securities analyst Chad Bartley, who rates Amazon "outperform" with a $460 price target, believes that Prime is going to be a major initiative for the company in the years to come, given the value proposition of Prime, and what's to come in the future for the service. Bartley believes that Amazon reached 21.5 million Prime members at the end of 2013, which would represent 47% year-over-year growth. That estimate would be an acceleration from 2012, when Bartley believes Amazon saw Prime members rise 46%.

According to a survey conducted by Bartley, most Prime members have joined the service in the last two years. Some 30% of Prime members haved subscribed to the service for less than one year, 34% for 1 to 2 years, 21% for 2 to 3 years, and 15% for three or more years, he said. Amazon started the free, two-day shipping and digital content service in 2005, when Bartley estimates it had just 600,000 subscribers.

ChannelAdvisor recently estimated that Amazon has around 23 million Prime members, which could mean that Amazon could end the first-quarter with around 23.75 million subscribers.

It's not known exactly how many Prime members Amazon has, but Macquarie analyst Ben Schacter recently confirmed with Amazon that it had more than 20 million members.

Shares of Amazon were higher in Friday pre-market trading, gaining 0.8% to $374.50.

Amazon's Prime members are the company's most valuable, with most of them spending a good chunk of money, buying goods and services from the Seattle-based online retailer. "For example, 15% of members who have subscribed for less than one year reported spending more than $1,000 a year, compared to 82% of members that have subscribed for three or more years," Bartley wrote in his note.

Though an extra $20 a year for two-day shipping and an enormous amount of television shows and movies may not seem like much, especially when compared to Netflix's (NFLX) $7.99-a-month streaming service, Bartley believes there will be some churn in the service. This, he noted, will be in the "middle to high teens, which would make the price increase revenue accretive to Amazon. Churn of lower-spending members and higher Prime pricing should also help profit margins."

In comparison, Netflix has over 33 million streaming subscribers, but does not offer any benefits to customers outside of content, whereas Amazon Prime offers two-day shipping for goods.

The longer a customer is a member of Prime, the more they spend on Amazon, as the retailer tries to move into seemingly every bit of online commerce, according to Bartley's survey. "This makes sense, as consumers want to derive as much value as possible from their annual fee and spend across more categories with Amazon."

Though it's not yet known how many members will leave the service due to the price hike, it's likely going to be revenue accretive to Amazon, and give a boost to the company's already paltry gross margins. If around half of the 38% of those who said they would quit, (a churn rate of middle to high teens), it could boost Amazon's revenues by $27 million. However, if all 38% of those members drop the service, Amazon could wind up losing as much as $405 million in sales.

TheStreet recently did a survey on the price increase, when Amazon first announced it was first considering raising the price of the service. Of the more than 1,000 people surveyed between Jan. 31, 2014 and Feb. 2, 2014, 70.1% of respondents said "no" when asked if they thought the service was worth having at a higher price, regardless of whether they are currently use it or not. Just 13% of the sampling subscribed to Prime.

Amazon has hinted in the past that it's planning "a lot of new stuff for Prime members over the next several years." Part of that could be the company's heavily-rumored music streaming service. While the service would put Amazon in competition with Pandora or Apple's (AAPL) iTunes Radio, it would be slightly different, capping how much users can use the service.

--Written by Chris Ciaccia in New York

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