In case you haven't noticed, Amazon.com shares are on a pretty good tear: They're up 1% this week, after an 8.9% surge last week. Because of that gain, the shares are up 12.3% in July. Oh, and they're up 57% this year, trailing only Netflix, which is up some 130%.
The current breakout, which pushed the stock to a new intraday high of $493.20 and a closing high of $488.10 on Monday, was started by excitement over last week's Prime Day sale. The sale was ostensibly a celebration of 20th anniversary of Amazon's web-site launch and 10th anniversary for the Prime service. The shares dipped to $488 on Tuesday as the market overall fell back and fell after hours after Apple's results disappointed.
Prime Day delivered lots of fun factoids: Better results than 2014 Black Friday. Sales of 1,200 televisions, 28,000 Rubbermaid sets, 35,000 "Lord of the Rings" Blu-ray sets. But no hard numbers on total sales -- as is Amazon's wont.
But remember this about those gaudy numbers: None of them will have a bearing on second-quarter results, due after Thursday's market close. The sales event, milked for maximum publicity, will impact only third-quarter results.
That said, it is worth pondering Amazon Prime. It is, in fact, more than a bit of shiny stuff for the company. Investors see Prime as a way for the online colossus to get more sales per customer. Plus, it creates a nice little income stream that can finance what one might describe as mundane activities like free shipping, grocery services and same-day delivery of purchases and more flashy ideas like development and production of original video programming.
Amazon Prime has an estimated 44 million U.S. customers, according to a study by Consumer Intelligence Research Partners, a Chicago investment-research firm. That's up from about 41 million at the end of 2014.
Amazon is converting 70% of customers trying Prime on a 30-day trial into paying customers. It's also retaining 90% of existing Prime customers, who pay $99 a year for the membership, the study says. That's roughly Costco Wholesale's experience.
This may be the kicker: 47% of Amazon's U.S. customers are Prime members, the study says. Which means they are motivated shoppers.
So, let us convert these numbers to dollars and cents. (Because Amazon won't.)
On annualized basis, Prime looks to be generating $4.4 billion in membership fees. Plus, Prime's North American users spend $1,200 a year on goods and services from Amazon. That translates into $52.8 billion in annual sales. Non-prime customers spend an average $700 a year. So, the incremental gain from Prime members' buying is about $3.1 billion. Just from North America.
So Prime is worth about $7.5 billion a year AT LEAST -- the sum of fees plus incremental revenue. If you believe Amazon's revenue will top $100 billion this year, that's 7% of the total, probably more. I can't see Amazon revenue missing $100 billionin 2015; the Street estimate is $103 billion.
Prime's revenue may be nearly as large as the revenue of Amazon Web Services, Amazon's cloud business. The cloud business generated about $1.6 billion in revenue in the first quarter and will report maybe $1.8 billion in the second quarter. Bill Miller of Legg Mason recently said AWS could generate $8 billion in revenue this year.
More importantly, AWS, which operates data centers in the United States, Australia, Brazil, China, Germany, Ireland, Japan and Singapore, generates pretty good profits: $265 million in the first quarter along with an operating margin of about 16.9%, compared with 3.9% for Amazon's North American operations and an operating loss of 1% for its international operations.
In the long run, Prime and AWS mean Amazon can continue to offer low-low margins on what it sells because these two revenue sources effectively subsidize the rest. In other words, it frees Jeff Bezos, whose stake in Amazon is now worth nearly $41 billion, to happily go on brutalizing retailing not just in the United States but elsewhere.
For the second quarter, the Street is guessing Amazon will report $22.36 billion in revenue, up 15.6% from a year ago, and a loss of 14 cents a share, an improvement over a per-share loss of 27 cents a year ago.
The losses may bother a lot of people but not the people who own -- or, more importantly, want to own -- the stock. They're looking at the free cash flow numbers, which is cash from operations less capital expenditures, the measure that is the holy grail for the company.
For the 12 months that ended on March 31, the free cash flow was $3.2 billion, up from $1.5 billion a year earlier. Amazon boosted the annual fee on Amazon Prime at the end of the 2014 first quarter. It saw AWS revenue nearly double.
But when third quarter results come out, here's a question to ponder about Prime Day. The sales will be interesting, but more important will be what it cost Amazon to get them. So, if you see operating margins shrinking in the third quarter, thank Prime Day for that.
But not to worry. Like most retailers, the fourth quarter is where Amazon makes its money.
