As we expected, killer quarter and 2Q guide from AMZN. Hike in Prime membership fee – reasonable, actually, given 20mm SKUs for prime at last (2014) increase from $79 to $99, and now 100mm SKUs today. Also much more value in the box – is NFL streaming, video content, exclusive films – shows, music and storage. Change is effective May 11th, in US only. US has about 68mm Prime Members by our survey math. We estimate ~60mm of those (88%) being on the annual plan. That means about $1.2bn incremental revenue flowing through at essentially 100% margin. That adds about 200bps to GP growth or about 50bps of margin. We have to start asking the question as to how many membership models the consumer is willing to stomach as prices inflate. I think the story in 2H will evolve from rev momentum to margin. Not sure how that can be bullish for AMZN (it’s 20% of XLY – fyi).
I care a lot more about the Amazon Ecosystem than I do picking a magic multiple on a high emotion mega cap. Here’s a few other points that McLean picked out from the call that apply to people covering Retail.
Amazon 1Q18 Print:
- The Amazon quarter was impressive.
- Revenue accelerated 470bps, gross margin expansion accelerated, and inventory growth was well below sales growth.
- 2Q guidance at the high end implies a slight decel, though Amazon just beat the top end of its 1Q guide.
- We still have concerns about a potential slowdown in 2H revenue, though Amazon got itself some cushion with the Prime price increase, and may look to offset a slowdown with a big profitability ramp.
- Regardless, it’s hard to poke any holes in this 1Q print. The only real negative we can find is a 100bps slowdown in C$ international revenue on a slightly easier compare. Note that Hedgeye Macro is making the call for Europe GDP growth slowing, that may be a driver here and a risk moving forward.
Ecosystem reads…
Prime Price Change
Effective May 11, Amazon is increasing the fee for U.S. annual plan from $99 to $119 for new Prime members. The new price will apply to renewals starting on June 16.
US has about 68mm Prime Members by our survey math. We estimate ~60mm of those being on the annual plan. That means about $1.2bn incremental revenue flowing through at essentially 100% margin. That adds about 200bps to GP growth or about 50bps of margin.
Amazon is doing it 1) because it can; the value is higher, why shouldn’t the price be. It hasn’t increased the price since 2014 when it had 1/5 the items available for Prime shipping (today at 100mm+). 2) its doing it because it needs an extra kick in a year facing tough 2H growth compares on potentially decelerating macro.
What could it mean for others? Perhaps its most likely to impact other membership models providing similar services that Prime does (music, video, storage) as customers may not want to pay for both at a higher cost.
Investing in Space For Bigger Products
From the Call: CapEx, which is predominantly tied to our fulfillment center network, is up 47%. That is above the Amazon fulfilled unit growth rate, but we've combined the strength of the FBA program and the space requirements as we -- against bigger and bigger products.
Clearly Amazon sees itself growing in large products. Furniture, and appliances are likely categories Amazon will take share in.
Video and TV
Amazon renewed its deal with the NFL to stream Thursday Night games as well as noting that it will continue to invest and grow video content.
The company is still adding value to the Prime service, and should be when raising prices. There are US still households out there to be converted, and the right content can help catalyze some new members.
Profitability Drivers
In addition to an accelerating in AWS, Amazon is seeing growth in advertising revenue (multibillion dollar business) which is also very high margin. These profit centers provide the kitty to continue investing at insane rates for greater US category penetration, and tapping new markets globally.
Hiring
Interestingly, this was the first quarter since 2010 where the employee count went down Q/Q. Employee count is still up 60% yy, but perhaps it means that Amazon has better management of seasonal workers around holiday demand, and that it doesn’t need to add people at the same rate after the hiring spike in 3Q last year.
One area AMZN said it will definitely continue to hire… software engineers. AWS revenue bullish.
Transportation
Amazon will continue to invest in its own transportation capabilities. As stated below, its integral in the implementation of new delivery services, handling peak demand, as well as properly serving certain markets.
“So we will continue to operate with this combination of external partners and internal capability. We like what we see so far with our Amazon logistics capability. It's well over 50% in some countries, particularly the U.K. It helps with again Prime Now and AmazonFresh and a lot of initiatives that we'll see which again we mentioned the Prime Now is tied in with Whole Foods, now in ten cities.”
In order to maintain its rate of share gain, AMZN needs to scale same-day, and manage demand spikes while working with USPS and UPS.
Taxes
Amazon was asked about the potential impact of the supreme court decision around state sales tax capabilities.
Amazon collects state sales tax for its own sales for all 45 states with sales tax, it collects on 3rd party sales for 2 states that require it.
On the call management said: “I think I would say we do continue to believe that the sales tax issue needs to be resolved at the federal level, and we're actively working with the states, with retailers in Congress to get federal legislation passed. We're not opposed to collecting sales tax within the Constitution and the permissible system that is both simple and applied evenhandedly.”
Though 3P units make up about 50% of what Amazon sells, we don’t think this decision would have a material impact on Amazon.
Prime International
The opportunity for Prime outside the US easily exceeds that within. Amazon continues to grow and tap new markets… the most recent large opportunity is India.
India has 1.3bn people, what’s the Prime sub opportunity there? Who knows. One thing is known, that Amazon is investing and growing Prime rapidly in this market.
“We'll continue to invest in India where we're seeing great progress with both sellers and also customers. And we like the momentum we've seen there. The Prime program started in the first year in India grew faster than any Prime excuse me any Prime program we've seen in other countries.”
