Stocks

Amazon Continues To Benefit From Prime Subscriptions

Amazon shares have been riding high since the company received a key upgrade from Raymond James earlier this week. The stock had pulled back earlier this month as Wall Street began biting its nails over China. It didn’t take long for shares of U.S. stocks to come roaring back, however, and Amazon’s strong fundamentals make it a poster child for growth.

Amazon sees 19% SSS growth

During the second quarter, Amazon recorded a 19% increase in same store sales. Morgan Stanley analysts Brian Nowak, Michael Costantini and Owen Hyde explained that same store sales on Amazon are essentially the “retail gross profit per dollar / customer growth.” They noted that this metric has accelerated over the last three consecutive quarters.

They also pointed out that the 19% year over year growth rate is about 1.8 times faster than the long-term average of about 10.5% growth.

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Amazon’s share of Wallet and Prime grows

The Morgan Stanley team attributes this strong growth in same store sales to Amazon’s rising wallet share. They noted that gross merchandise volume per customer is now up 20% compared to last year. Also analysts at multiple firms have pointed out that the e-commerce giant continues to grow the number of Prime subscribers. This is particularly important because, as the Morgan Stanley team points out, Prime users tend to spend about 20% more than non-Prime members.

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They also note that the spending data comes from a survey conducted by comScore, so it “admittedly may be understating the behavior modification effects of Prime.” The reason they think this is because some of their contacts have told them that members who have been subscribing to Amazon Prime for seven to ten years could spend between eight and ten times more than non-Prime members.

Amazon growing strong internationally too

The analysts also released the data from their latest AlphaWise survey. Amazon has been highlighting the speed at which Prime membership has been growing. The company recorded a 53% year over year increase in members in 2014, with half of that growth coming in the U.S. According to Nowak and team growth of Prime membership has been coming faster internationally starting in the second quarter.

Their AlphaWise survey recorded a 9% quarter over quarter Prime member growth from the fourth quarter of 2014 to the first quarter of this year. Of that growth, 4% was in the U.S., while Germany saw a 26% increase in members and the U.K. clocked a 30% increase quarter over quarter.

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U.K., Germany growth remains strong

The U.S. is still Amazon’s biggest market for Prime membership, but the Morgan Stanley team is impressed with the growth in the U.K. and Germany. Prime membership in Germany increased 1,390 basis points, while U.K. membership grew 920 basis points. They also found that the churn rates in both countries declined, with Germany’s churn rate falling 1,390 basis points and the U.K.’s churn rate declining 640 basis points.

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Nowak and team also noted that the strong growth and low churn rates are happening even though Amazon announced a more than 60% increase in pricing for Prime. The company raised its U.K. price 61% and its Germany price 69%. Further, the analysts say Germany and the U.K. contributed about 60% of Amazon’s total international revenue last year, so continued strength in these two countries is especially important for the company going forward.

Amazon Prime Video boosting growth

Interestingly, the Morgan Stanley analysts think Amazon Prime Instant Video is contributing to Prime’s growth internationally. Most surveys comparing video streaming services indicate that Amazon’s offering isn’t doing very well compared to competitors like Netflix, although the U.K. has been a comparatively strong market for the company’s streaming video service.

Amazon rolled out Prime Instant Video in the U.K. and Germany in April 2014, and the Morgan Stanley team thinks this is increasing the stickiness of the company’s platform. Other factors they believe are helping boost Prime subscriber growth are a greater number of SKUs, better pricing and Fulfillment by Amazon.

As of this writing, shares of Amazon were down 0.43% at $516.15 per share. Morgan Stanley analysts continue to rate the company at Outperform with a price target of $740 per share. They would be buyers on any weakness in Amazon shares based on the greater market disruption.

All graphs/ charts in this article are courtesy Morgan Stanley.