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Prime Focus Paying Off for Amazon

Posted on Monday, May 1st 2017

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According to BI Intelligence, US consumer online spending will grow from $385 billion in 2016 to $632 billion in 2020. While the average US retail growth rate was just 2% in the first half of 2016, it was 16% for e-commerce. Amazon (NASDAQ: AMZN) is the dominant force in the US e-commerce sector with a 43% market share fuelled by the success of Prime memberships. I expect their market share to grow as they master new categories of retail.

Amazon’s Financials

Amazon’s first quarter revenues grew 23% over the year to $35.7 billion, beating analyst expectations of $35.3 billion. EPS was $1.48 per share, surpassing the Street’s forecast of $1.12 per share. Net income increased to $724 million from $513 million a year ago. Operating income decreased 6% to $1 billion.

By segment, net product sales increased 15% to $23.7 billion and net services sales grew 41% to $8.5 billion.

AWS continues to provide both growth and profitability to Amazon’s portfolio. It accounts for 10% of total revenue. AWS net sales grew 43% to $3.6 billion and operating income grew 48% to $890 million.

North America net sales grew 24% to $21 billion or 59% of total revenue and operating income was flat at $596 million. International sales grew 16% to $11 billion and operating loss grew to $481 million from loss of $121 million a year ago.

For the current quarter, Amazon projected revenues of $35.25 billion-$37.75 billion or 16%-24% growth with operating income of $425 million-$1.975 billion. The Street was looking for revenues of $35.3 billion.

Amazon’s Initiatives

Amazon has over 80 million Prime members worldwide and 58 million in the US. About 60% of the US customers have Prime memberships. Prime members spend $1,300 per year with Amazon, compared with $700 for non-Prime members.

Content continues to be a strong focus area to beef up its Prime service. This month, Amazon announced that NFL has selected Prime Video as its exclusive partner for live streaming of Thursday Night Football games. The deal cost Amazon $50 million in addition to $30 million it will spend on marketing and promotion of the football league.

Amazon Video Direct, Amazon’s digital self-publishing service, launched the Film Festival Stars program to establish a distribution model for films screened at major film festivals and provide rights holders with flexibility and control in monetizing their films. Since launch, 15 films have opted into the program.

Fashion is a new focus area for Amazon. Amazon Fashion introduced seven private apparel brands to Prime members, including Goodthreads, Amazon Essentials, Paris Sunday, Mae, Ella Moon, Buttoned Down, and Lark & Ro.

Amazon has also introduced Echo Look, which combines features of Alexa with a hands-free camera and built-in style assistant. You can ask Echo Look to take a photo or short video, share your look, or get a second opinion on what to wear using Style Check, which combines machine learning algorithms with advice from fashion specialists. Apparel is a gigantic industry where Amazon has had a relatively low presence. With this move, they’re about to open up a whole new category in a very big way. The segment has tremendous scope for personalization, and I expect to see magic, given Amazon’s extensive algorithmic capabilities.

I also expect that they will focus more strategically on other fast growing categories of online retail, for example, mattresses.

The market is pleased with its performance. Its stock hit a 52-week high of $949.59 following the results. It is currently trading around $924.99 with a market capitalization of $445.28 billion. It hit a 52-week low of $654 in May last year.

Photo Credit: simone.brunozzi/Flickr.com

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