The way I see it, Amazon.com selling Amazon Prime using annual fee is almost parallel to insurance company selling coverage using premium.
Both offer “perceived value” greater than the price being charged. Of course, the actual value kicked in once you filed an insurance claim to cover your unexpected loss in the case of insurance. Or you actually read a free new rental kindle book every month, engaged in multiple shopping expedition in Amazon.com that incurred multiple 2 days free shipping; and watch Amazon prime TV or movies while commuting daily.
Giving the scenario that the average Amazon Prime member probably may not engage in active pursue of taking advantage of the benefits Amazon Prime has to offer, I can imagine Amazon.com’s receipt of the Prime membership more than offset the cost of providing the services being offered. In other words, a business model not unlike that of insurance company.
Here is my extrapolation. The way it is now, the popularity of Kindle Fire feeds the fire for Amazon Prime. And in the not too distance future, I expect to see Amazon.com offering a “free” Kindle Fire just for signing up for Amazon Prime membership for the first time. If we see this kind of offer, then we know Amazon.com hit another milestone on their business model. Edit: Some might think it is too costly to offer a free Kindle Fire to new Amazon Prime member; but I think the fact that they can make this offer mean that their renewal rate is high and the production cost of Kindle Fire has come down.
In summary, Amazon.com is NOT Netflix. In other words, I just don’t see Amazon.com trading the way Netflix did in 2011.
And I’ll be looking for an opportunity to buy back AMZN when the chart look right.
Good Hunting!
If you enjoy the content at iBankCoin, please follow us on Twitter
Damn good theory.
Indeud.
Giving that Amazon.com sold millions of Kindle Fire in December, I’m curious to know if their Amazon Prime membership went up as well. We will soon find out in the next earning report.
Like any insurance business, there must be membership increase to make this model work. And most important of all, there must be an increase or at least a stable number of membership renewal.
Thanks for reading the post.
Good Hunting!
Update: I’m long AMZN since it broke the high of Jan 4th, 2012.
I would take the opposing side of that argument. In my opinion, AMZN is making a gamble. Sacrificing profits now, with the expectation of profits in the future via ebook sales. This is pretty easy to see when looking at their financial results. Check this chart out.
http://ibankcoin.com/10banger/files/2011/12/AMZN1.png
Keep in mind that is North American, but I can assure you the international chart looks similar. Anyway you cut it, AMZN is experiencing a margin squeeze.
If you’re looking for the source for the above chart, check out the AMZN Q3 slideshow.(http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQ0MzM2fENoaWxkSUQ9NDY3MTc0fFR5cGU9MQ==&t=1)Notice, AMZN shares took a dive on these results.
I could go further and mention with increased streaming, comes increased risk of telecoms charging by usage.
I could also mention, you can borrow unlimited ebooks from the library for free. (I do this) Who’s going to pay for that?
Anyways, It’s always good to hear another side of the story, gives you better perspective.
Amazon Prime only allows 1 book borrow per month; even so, the “perceived value” is already greater than the $79 annual fee if each borrowed book cost $9.95 in Kindle format.
Btw, my whole argument is that not every Prime membership is going to read a book every month. My thesis is that the money received from the Amazon Prime (million of members) will be more than offset the cost of providing the services.
The financial information you posted only reflected the past performance; it is the expectation of future profit that drive the stock price. And yes, if the earnings or forward guidance did not meet expectation, the price will drop- a risk all trader must take to make a bet based on their style of trading.
But then, it really doesn’t matter which side of the viewpoint we have on Amazon.com; what matter is where the price action is going. If it is trending up, it will be foolhardy to fight the tape.
Our job as a trader is to take a piece of the action- the middle part for we will never be able to buy the bottom and sell the top.
Fundamental analysis is only a subset of all the tools we used to make a decision. After all, trading is nothing more than making decision that pertain to the future. An unknown realm that the stock price is trying to reflect. And thus create the challenge that captivate men and women who pursued the capitalistic dream in which only a few can really make it big.
In a nutshell, fundamental information may or may not support the price action; but it is the price action that create the market rhythm we need to listen to. And it is the only thing that matter. If you believe Amazon.com will come down to zero; then let the price action guide you instead of jumping the gun based on fundamental.
Good Hunting!