Jon Hadad

About the Author Jon Hadad

Jon Hadad graduated from the University of Delaware with a degree in political science. Prior to joining the Smarter Analyst team, he was an industry analyst at a New York research firm.

Should You Sell Amazon (AMZN) Stock as Prime Membership Slows? This Analyst Says No


As Amazon (AMZN) continues to dominate in e-commerce, the company is facing a rising challenge: A deceleration in Prime membership growth.

Amazon Prime membership offers customers free two-day shipping on millions of products, as well as access to a collection of Netflix-style TV shows and movies through its streaming service. It has been one of the primary factors to Amazon’s tremendous growth, as it helps retain customers better than those who are not Prime shoppers. However, membership is increasingly nearing saturation, with 103 million Americans members and growth rates declining.

However, Evercore analyst Greg Melich remains bullish on AMZN, raising his price target from $1,965 to $2,200, while reiterating an Outperform rating on the stock (To watch Melich’s track record, click here)

While Melich sees Amazon’s Prime membership problem as growing, he doesn’t see this as unexpected. The analyst believes, “the explosion of Prime membership to over half Americans in 2017 has been followed by the inevitable slowing of growth in this key metric,” with his “latest survey of 2,500 U.S. [households suggesting] the growth in Prime [households] is now below 10%.”

But while Prime membership growth is declining, Melich is optimistic that Amazon can keep sales high. He says the company “so far is successfully seasoning spend per member at an upper teens pace, expected to reach $2,500 this year.” So, while the total number of members is growing at a slower rate, the amount of money members spend on Amazon is increasing, contributing to higher total sales.

A major reason for the increase in spending by Prime members is continued new offers by Amazon. For example, the company recently announced it would speed-up delivery from two-day to one-day — a major driving force of Prime has been this quick delivery, something that other retailers are finally starting to offer. Amazon can undercut the competition on delivery as it generates significant profit in non-retail streams, allowing that revenue to be reinvested in e-commerce. Melich says, “the decision to reinvest 3P and ad profits in 1-day delivery is consistent with efforts to push spend/member past $4,000.”

All in all, Amazon is the dominant force in online retail and continuing to approach Walmart’s market share in total retail. But non-retail revenue and profit have been key to Amazon’s growth, as sales from 3PL, ads, and AWS have all contributed to Amazon’s ability to reinvest in itself and offer customers unique. This has made its stock very, very attractive.

The e-commerce giant still looks like a very compelling investing opportunity, at least according to TipRanks. TipRanks analysis of 36 analyst ratings on the stock shows a Strong Buy consensus, with all 36 analysts recommending Buy. The average price target among these analysts stands at $2,245.47, which implies nearly 17% upside from current levels. (See AMZN’s price targets and analyst ratings on TipRanks)

 

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