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Amazon.com, Inc. Price Target Upped Again For Strong Prime Growth

It seems the euphoria surrounding Amazon never ends, as the online retailer has received another price target increase. Some analysts have even raised their targets to $1,000 or above, but this latest increase stops short of that. Amazon Prime continues to be a favorite area of interest for Wall Street—and a major source of concern for brick and mortar retailers in the U.S.

Amazon price target to $950

In a report dated October 5, Morgan Stanley analyst Brian Nowak reiterated his Overweight rating and said he increased his price target for Amazon from $800 to $950 per share. He cited his firm’s AlphaWise data on the retailer’s Prime subscribers.

The data indicates that Amazon now has 60 million Prime members worldwide and that this metric has grown 28% over the seven months ending in May. In other words, Amazon has added 13 million Prime subscribers in seven months. Nowak said the company is particularly strong in the U.S. where it has 41 million Prime subscribers.

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He explained that free two-day shipping is still the most popular reason people give for signing up for Prime, but more and more European and Japanese subscribers give Prime Instant Video as a top reason.

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Nowak believes the strategy of using Instant Video to grow its subscriber base is working and views the expansion into France, Italy, Spain and India as an additional tailwind to Prime subscriber growth. As a result, he now expects Amazon to hit 100 million Prime subscribers in 2018—a significant increase from the 88 million he had been expecting before.

Amazon Prime subscribers are valuable

The analyst’s AlphaWise data shows that Prime subscribers spend 4.5 times more than non-Prime members. He reports that the average Prime member spends about $2,500 per year on Amazon, compared to $550 for the average non-subscriber. Further, he said about 40% of Prime members in the U.S. spend more than $1,000 on the website per year, compared to just 8% of non-subscribers.

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He reasons that after shoppers sign up for a Prime subscription, there’s a 40% chance they will spend at least 1.8 times more than the average non-subscriber.

Nowak believes that one driver for the dramatic difference in spending among Prime spending depends on how long each shopper is a member. He said that Prime modifies behavior, causing people to shop more often and in more categories. In fact, his “industry conversations” suggest that some Amazon users who have been Prime subscribers for seven to ten years spend as much as ten times more than non-Prime members.

He believes that this is not only bullish for the online retailer’s long-term growth but also for the 2016 holiday shopping season. He warns that some of the consensus numbers for Amazon’s first quarter of fiscal 2017 look “a bit stretched” because of the ramp in spending on fulfillment and content during the lower volume quarter but adds that he would buy any weakness from a weak first quarter guide.

Competitors, watch out for Amazon Prime

Cowen and Company analyst Oliver Chen also spoke highly of Amazon Prime earlier this week, warning the company’s competitors that they have much to worry about. The so-called “Amazon effect” is an area many firms have been watching all year. Cowen’s proprietary data points to Prime homes making up 40% to 50% of major retailer customer bases this year, compared to 20% to 30% three years ago. He sees Target, Sears, Kmart and Walmart as being the most at risk from Prime.

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Amazon shares edged higher by as much as 1.25% to $844.49 following Morgan Stanley’s price target increase.