Hardly any online shopper could have missed the barrage of specials on Amazon’s (NASDAQ:AMZN) “Prime Day”. And hardly and Amazon stock investors could have missed it either.
This is a specially invented holiday first started in 2015 — Amazon’s 20th anniversary — to compete with the traditional “Black Friday” shopping hysteria following the day after Thanksgiving.
Ending last Tuesday, Prime Day was extended to a 48-hour event that listed over 1 million items at prices marked down from Amazon’s already rock-bottom prices. While many items on sale are likely loss leaders, meaning they are sold at below cost simply to attract web traffic, the ultimate goal is to grow the number of paying Amazon Prime subscribers.
Membership to Amazon Prime, which offers free delivery on most items and a list of other perks, such as a variety of free online streaming videos, costs $119 a year or $59 a year for students. Analysts estimate that while regular Amazon customers spend an average $600 per year, Amazon Prime members spend an average of $1,400 a year.
Getting listed as an Amazon Prime Day special can be an outright windfall for vendors. According to Amazon on Tuesday afternoon, with just hours to go before the close of Prime Day, “Worldwide sellers — predominantly small and medium-sized businesses — saw the biggest 24-hour sales day in Amazon history.”
Preliminary estimates suggest that the second Prime Day even generated $5.8 billion in sales.
With Amazon stock now trading near an all-time high of $2,010, giving it a market capitalization of nearly $1 trillion, the company is more valuable than the economies of many African nations. Can there be any upside left for AMZN shares?
The Future of Amazon Stock
The answer could be in how successful Amazon is in leveraging a few high-growth product categories. Top-line revenues will most likely continue to see double-digit growth. But, that alone may not lead to AMZN stock being able to meet and beat highly optimistic analyst earnings forecasts.
Almost all of Wall Street is cheering Amazon stock on with consensus estimates and if all goes according to plan, they expect earnings to also grow by double digits. In fact, Jeff Bezos, Amazon founder and the world’s wealthiest person even after he made the largest divorce settlement in history, has often commented that for AMZN to grow past the $250 billion annual revenue target, it will need to rely heavily on expanding sales of low-margin, generic items. These include t-shirts, tube socks and groceries.
In short, Amazon’s core top-line revenue driver will continue to be competing in the retail consumer market as an online Walmart (NYSE:WMT). However, low priced t-shirts and tube socks do not exactly deliver the juicy profit margins of Apple’s I-Phone X. And they aren’t necessarily the primary driver of AMZN stock in the bigger picture.
Growing top-line revenues by offering rock-bottom prices is simple enough. But will that top-line growth actually trickle down to earnings?
Bottom Line on AMZN
Some areas that investors will focus on are a few select high margin businesses, such as Amazon Web Services. Already, their fastest-growing business unit, AWS provides cloud computing processing power and data storage on a pay-as-you-go basis, much like an electric utility. Initially offered in 2002, AWS sales for the first quarter of this year reached $7.7 billion. This was a 41% increase from the $5.44 billion a year earlier, and it slightly beat the $7.69 billion average analyst estimate. This massive growth in AWS makes it the dominant source of earnings growth for all of Amazon. That will be a tough number to beat.
Amazon has also launched its in-house fashion line which, according to Cosmopolitan, is “pretty damn cool.” Along with serving as an official retail outlet for pricey luxury items from designers such as Calvin Klein and Michael Kors, AMZN is clearly investing heavily in a number of high-margin businesses far removed from tube socks and t-shirts.
The next quarterly earnings announcement for Amazon will be July 25. Over the last few years, Amazon stock has racked up an impressive record of surprising the market by announcing numbers exceeding estimates. Enthusiasm about the next earnings release is at a dizzying peak to the point that the market expects little short of Amazon announcing that it discovered a cure for cancer and found a solution to end global warming.
However, many skeptics are starting to bail on AMZN stock and taking profits now. The slightest hiccup in the frothy Amazon story with earnings-per-share numbers actually falling a few pennies below analysts’ forecast, and an utterly unthinkable scenario, could lead to a rapid de-frothing of Amazon stock’s sky-high share price.
As of this writing, Theodore Kim did not hold a position in any of the aforementioned securities.