Tagged: AMZN
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Amazon’s (AMZN) subscription business is roaring with very strong year on year growth and trailing twelve-month revenue of more than $30 billion. There has been a debate that the subscription business growth will level off as the company saturates the addressable market for its Prime membership. However, recent numbers reported by the company do not show any signs of saturation. The year-on-year growth in the last quarter was 24% which is a very good rate considering the annual revenue base of more than $30 billion. Netflix (NFLX) has recently increased its subscription prices which increases the chances that we will see a similar increase by Amazon Prime adding another tailwind for this segment.
Amazon is aggressively marketing its Prime membership in international regions like Europe, India, Australia, and others. This gives the company a longer growth runway to expand its subscription business. It would be important to note the future growth trajectory of this business as it has a massive halo effect on other products and services launched by Amazon.
At the current growth trends, Amazon’s subscription business should be hitting $100 billion mark within the next 5 years. Its standalone valuation could already be close to half a trillion dollars. This segment will be one of the main drivers for the future of Amazon stock as the company invests heavily to improve its logistics and fulfillment capabilities.
No sign of saturation
Amazon’s Prime membership has been very popular in the domestic US market as well as international regions. The revenue from subscription business has allowed Amazon to invest in expanding its fulfillment services. This business has also helped the company in ramping up its investment in video streaming business which is now one of the main players in the streaming industry. In the trailing twelve months, the subscription segment reported revenue of over $30 billion. Despite this massive revenue base, the Y/Y growth rate in this segment continues to be very high.
In the latest quarter, the subscription business grew by 24% on a Y/Y basis. If the company is able to deliver growth rate in the range of 20% to 30% over the next five years, we could see the subscription revenue exceed $100 billion annually.
Amazon prime membership growth
The Prime membership base has continued to grow despite the pandemic. Some analysts pointed out that the economic downturn will hurt Prime membership as customers could end this membership. However, the growth in the past few quarters has shown that Amazon has built a strong moat around its Prime services which should help the company in an economic downturn.
Many options for growth
There is a strong argument that Prime membership has already reached most of the addressable market in US. However, Amazon still has a number of options to deliver future growth in its subscription business. This includes an increase in Prime membership fees, international Prime membership growth, new services at additional fees, attractive video streaming business, and more. It has been four years since Amazon last increased its Prime membership fees in US.
It is likely that we will see another increase in the next few quarters as the pandemic recedes and the overall economy bounces back. Amazon has recently increased its Prime membership in India which is an important international region for its operations. The annual fee was increased from INR 999 ($13.5) to INR 1,499 ($20). This is a very value-focused region which has led to low membership fees by other players like Netflix and Disney (DIS). Amazon’s massive growth during the pandemic has given confidence to the management that they can now make aggressive price increases in this region. We should see similar Prime membership fees increase in other international regions. Even the domestic US market could see a good price increase as it has been close to four years since the last Prime membership fee hike.
Amazon has also entered into a close partnership with Deliveroo in UK and Ireland where Prime members get discounts on food delivery. If Amazon decides to enter the food delivery business it can open new growth options for Amazon’s subscription business in the future.
Streaming goliath
Amazon spent $7.8 billion on its video streaming business in 2019. This was increased to $11 billion in 2020. It is likely that the company would have made another big increase in 2021. The company is spending big bucks to develop very expensive shows like “Lord of the Rings” where it is reported that the company will spend over $1 billion.
Most of the attention in the streaming wars has been on Netflix, Disney, and HBO. However, Amazon can end up being the winner because of the other services added to its Prime membership. Amazon is also front-loading most of the benefits of Prime to its international regions. Hence, customers in Australia, India, and Europe can also enjoy streaming content and Prime membership at a much lower cost. There is also an additional investment in local streaming content to make the services more attractive to audiences across the world.
We can see from the above figure that Amazon is one of the key players in the streaming business according to the content spend. The company also has an advantage due to the flywheel of its Prime services. It is likely that Amazon will continue to increase its streaming budget over the next few years as the subscription revenue increases. This should put the company in a good spot compared to other competitors.
Impact on stock valuation
Slower growth in the overall revenue has caused some correction in the stock. However, Wall Street could end up focusing more on businesses like streaming segment which has a strong revenue growth with a large base. If the company can show Wall Street that it is on a strong path to improve its subscription revenue over the next few years, we could see a big bullish sentiment towards the stock. There are no peers to Amazon’s Prime membership business. But we can gauge the valuation of this business by looking at some of the metrics of Netflix which is a pure streaming business.
Netflix had a trailing twelve-month revenue of close to $30 billion which is similar to Amazon’s subscription business. Both Netflix and Amazon have close to 200 million members worldwide. However, Amazon’s subscription revenue growth rate has been a lot higher than Netflix over the last few quarters. In the recent quarter, Netflix reported a 16% Y/Y growth rate while Amazon’s subscription revenue grew by over 24%. Netflix is trading at a P/S ratio of close to 10. Because of the halo effect of Prime business, it is likely that Amazon’s Prime business would get a premium multiple compared to Netflix. Even at a modest P/S multiple of 15, Amazon’s Prime business would currently be valued at $450 billion.
Investor Takeaway
Amazon’s subscription business is one of the core reasons to invest in its stock. The subscription business provides a recurring revenue base with good growth. It also has a strong economic moat to shield the company against economic downturns. We should continue to see subscription revenue growth in the range of 20% to 30% over the next few quarters as the company expands in international regions. Future Prime membership fees hike will also be a big boost to the subscription business.
Amazon is investing heavily in its streaming business and could end up rivaling Netflix and Disney. Netflix has traded in the range of 8 to 10 times its P/S ratio over the last few quarters. Higher growth rate and flywheel impact of Amazon subscription should get this segment a premium valuation of at least 15 times the revenue. At this multiple, the standalone valuation of Amazon’s subscription business is close to half a trillion dollars or over 30% of the current stock valuation. The subscription business will continue to be one of the key drivers of Amazon’s stock valuation over the next few quarters.