No one’s ever complained about free shipping. And neither is Baird’s top analyst Colin Sebastian. Here’s what you missed: November 5, Amazon (AMZN) announced it would eat the costs of standard shipping for any eligible item – and for anyone in the U.S. as the holiday season gets nearer.
Sebastian says he doesn’t believe the undertaking will be such a financial burden on the company. The analyst guesses Amazon will decrease spending on holiday advertising in order to make up for the loss and assumes a “minimal” impact of 5-6% overall to Amazon’s fourth-quarter operating profit. He also notes this change may even have been adjusted in the company’s Q4 guidance.
“For the sake of this analysis, we assume that the free shipping promotion is worth roughly $100 million in holiday ad or other promotional spending. As such, we estimate the net impact of this free shipping promotion to be a $300 million drag on operating income (less than 0.5% of total revenues,)” Sebastian said.
The analyst continued, “For Q4, we estimate that roughly 15-20% of U.S. Amazon orders will be non-Prime, of which roughly half will be <$25, and which 50-75% will take advantage of the free shipping – with the remaining orders opting for paid shipping options for faster delivery. We also assume the free shipping promotions will drive somewhat higher order volume with a slight increase in AOV. As such, our “back of the envelope” analysis (see Figure 1 below) suggests Amazon will generate roughly $5, $500 million in incremental revenues, and an equivalent amount of incremental shipping costs.”
Sebastion goes on to note Amazon should be better positioned to manage discount shipping than smaller e-commerce competitors. The analyst predicts the marketing move could provide AMZN a competitive advantage if the free shipping promotion extends beyond the holiday period.
With that boost of confidence in mind, Sebastian reiterates an Outperform rating on AMZN stock with a price target of $2,100.
According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, 5-star analyst Colin Sebastian has a yearly average return of 22% and a 68% success rate. Sebastian has a 43.5% average return when recommending AMZN, and is ranked #22 out of 4,887 analysts.
Out of 37 analysts who are looking into Amazon stock, 36 are Bullish and only one is sidelined. The consensus price target is $2,168.38, which shows an upside of 33% for the e-commerce stock. (See AMZN’s price targets and analyst ratings on TipRanks)