RBC Capital’s Ross Sandler this morning reiterates an Outperform rating on shares of Amazon.com, and a $205 price target, ruminating on the detail of the company’s subscription offering, “Amazon Prime,” which bills as “a major part of the growth story.”
Sandler, noting there is “much debate” over the exact member numbers for Prime, writes that he estimates it at 15 million paying members around the world, “and growing more quickly than the overall company growth rate,” based on some digging into the balance sheet.
Specifically, Sandler, after looking at the “unearned revenue” balance for Amazon, backing out hardware sales for the “Kindle” e-readers, and revenue from Amazon’s “Amazon Web Services,” writes that Amazon may be enjoying 27% year-over-year growth in 2010, and “in line with (or potentially ahead of) revenue growth of 41%” in 2011.
Sandler also offers a survey conducted in mid-March among 2,800 U.S. customers of Amazon, including 2,200 Amazon shoppers, 370 Prime members, and 240 former Prime members.
The key takeaway, writes Sandler, is that “our survey data disputes the theory that as Prime membership grows and basket size per order potentially declines, Amazon is likely to face declining unit economics.”
The survey showed the majority of Prime members would not pay more than the $79 annual fee, while 23% would pay as much as $99.
The results of that survey also showed that Prime members buy more frequently, on average:
The data shows that 43% of Prime members place 2–3 orders per months while 43% of non-Prime shoppers place fewer than one order per month. If we assume the midpoint of each order range and cap “more than 5” at 6 units, we arrive at an average of 2.5 orders per month for Prime members and 1.3 orders per month for non-Prime shoppers. This equates to approximately 30 orders and 15 orders per year for Prime and non-Prime, respectively.
The survey also showed that orders rose after people joined Prime:
Prior to joining Prime, more than 37% of shoppers placed less than one order on Amazon per month, and that number falls to almost 14% once they became Prime members. However, before joining Prime, 27% of shoppers placed 2–3 orders more month and only 2% of shoppers placed more than five orders per month; after joining Prime, those rates jumped significantly, to~43% and 11%, respectively. Applying the same midpoint distribution analysis outlined above, the average number of orders placed per month after joining prime increases from 1.0 order to 2.52 orders, or approximately 153%.
Amazon shares today are down 88 cents, or 0.4%, at $203.73.