, Inc. (AMZN) Could See Net Gains From Prime Price Hike

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Raymond James analyst Aaron Kessler comes away from the news of Amazon’s Prime price hike with an optimistic slant, keeping his Strong Buy rating on the stock.

Amazon prime membership price hike

Takeaway: Following, Inc. (NASDAQ:AMZN)’s announcement of its $20 price increase for Amazon Prime membership in the U.S., we remain positive on shares and reiterate our Strong Buy rating. We are positive on the price increase as 1) the $20 increase (from $79 to $99) should not have any material impact, in our opinion, on current Prime user numbers given the significant value Prime membership delivers to its users; 2) it improves the financial picture of a Prime user –, Inc. (NASDAQ:AMZN) had not raised pricing in nine years for Prime members, despite significant increases in shipping costs and orders per customer; 3) we expect the price increase could potentially drive upside to Street revenue and operating income estimates (we estimate a $280-340 million impact to revenues on an annualized basis).

On Wednesday,, Inc. (NASDAQ:AMZN) announced a price increase for Amazon Prime in the U.S., marketing the first increase for Prime membership in nine years. On its 4Q call, Amazon indicated that with the increased cost of fuel and transportation, as well as the increased usage among Prime members, it was considering increasing the price of Prime membership between $20 and $40 in the U.S. Existing Prime members will now pay $99 (up from $79) on their annual renewal date while Amazon Student members will pay $49 (up from $39). Amazon Prime includes unlimited free two-day shipping on eligible purchases, unlimited streaming of the Prime Instant Video, and access to the Kindle Owners’ lending library.

Financial impact

Based on, Inc. (NASDAQ:AMZN)’s statement that it has tens of millions of Prime members as well as third-party stats (i.e., ChannelAdvisor), we estimate Amazon Prime members represent approximately 10% of Amazon’s 237 million customers. Assuming a range of 9-11% (21-26 million Prime customers) and that, Inc. (NASDAQ:AMZN) U.S. Prime customers represent approximately two-thirds of total Prime users, this would equate to 14-17 million U.S. Prime customers. Based on these estimates, as well as the $20 price increase, this equates to a $280-340 million positive impact to revenues, with the majority of this dropping to the operating income line. We note our 2014 non-GAAP operating income estimate for, Inc. (NASDAQ:AMZN) is $2.9 billion. We are not changing our estimates at this point as our non-GAAP operating income estimates anticipated 50 bp and 140 bp of margin expansion in 2014 and 2015, respectively.

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