UBS analysts Eric J. Sheridan, Timothy E. Chiodo, and Vishal J. Patel look at Amazon in light of its announcement of changes to its Prime membership fees.
Prime to $99 From $79
This morning, Amazon.com, Inc. (NASDAQ:AMZN) announced membership fee changes for its Prime subscription service. Upon renewal, existing Prime members will now pay $99/yr (up from $79, a 25% increase). Amazon Student Prime members will now pay $49/yr (up from $39, a 26% increase). The Prime Fresh membership fee will remain unchanged at $299. We note that Prime members renewing before April 17th will be charged at the old rate.
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Thesis Playing Out: Signs of Additional Investment Behind Prime Offering
On Feb 2, 2014, we downgraded Amazon.com, Inc. (NASDAQ:AMZN) from Buy to Neutral on the surprise decel in revenue & paid unit growth trends, as well as the results of a proprietary Amazon Prime survey. The key takeaways from our survey work were as follows: 1) $99 (the price point Amazon has chosen) was the high point for an acceptable renewal rate; 2) a price increase would likely entail the need to layer in more services (i.e., higher costs for Amazon) to bolster the Prime offering – recent press reports that Amazon.com, Inc. (NASDAQ:AMZN) is working on a streaming music service would corroborate this view, along with the decision to bundle in LoveFilm with Prime to support UK price increases; & 3) more extensive marketing may be required to educate the consumer on the full range of benefits of Prime. Additionally, Amazon has shown signs of continued investment in its content library including exclusive content licensing agreements (BBC for Orphan Black, MGM for Teen Wolf, additional MGM films) and 10 additional original production pilots.
Early Q1 Checks Point to Decelerating 3P Revenue Growth
ChannelAdvisor data for Jan ’14 showed 14% Y/Y growth for Amazon.com, Inc. (NASDAQ:AMZN), vs. 29%, 25% and 21% during Q2-Q4 2013, respectively. We believe increased use of Google Inc (NASDAQ:GOOG) PLAs & alternative advertising channels have partly driven these declines. That said, the late January announcement that Amazon Product Ads would be receiving more prominent placement (intermingled w/Marketplace Listings) could help mitigate this trend.
Valuation: Maintain $375 PT, Neutral Rating
Our $375 PT is based on our weighted average approach (EV/Gross Profit, EV/EBITDA, EV/FCF) applied to our 2013-2015 estimates.