By Dow Jones Business News,
January 31, 2014, 10:56:00 AM EDT
By George Stahl and Greg Bensinger
Amazon.com Inc. shares fell up to 9.4% Friday as continued concerns about the company's spending habits outweighed the
higher revenue possible from raising the price of its popular Prime membership.
Investors' faith in Amazon has relied in part on consistent sale gains fueling the company's lavish spending on
warehouse construction and secretive internal projects that it has indicated will yield bigger returns in the future.
In the fourth quarter, Amazon's revenue rose 20%--but so did the company's operating expenses. In the end, the
company's results failed to match Wall Street projections.
Along with its results, however, Amazon also said it could lift the $79 annual fee for its popular Prime two-day
shipping service by $20 to $40. Doing so could add between $500 million and $1 billion in revenue, with no added
expense, analysts said.
"While the increase in Prime pricing appears to be a positive for margin in the near term," J.P. Morgan analyst Doug
Anmuth said, "we believe Amazon is likely to re-invest some of the additional shipping revenue to increase capacity."
Prime members are valuable to Amazon because, by some estimates, they spend about twice as much as nonmembers. The
program offers unlimited two-day shipping on many items, discounts on some services like same-day delivery, and
The company has said it has tens of millions of Prime members world-wide but has declined to give specific figures.
"We believe the significant customer engagement on Prime ... will limit attrition and in fact could further incent
Prime members to spend a higher [percentage] of wallet" on Amazon, said Janney Capital Markets analyst Shawn Milne. He
added that, if true, those trends wouldn't be good for retailers and eBay Inc.
Despite the higher revenue from the potential Prime price increase, concerns remain about how Amazon may use the
"Amazon is unlikely to provide investors with a strategy road map," Wedbush analyst Michael Pachter said.
"While recent announcements have given us increased visibility into Amazon's revenue growth," Mr. Pachter said, "we
are not convinced that the company will share sufficient details about spending plans to allow us to accurately model
profit growth, and it may take time before [earnings per share] grows sufficiently to justify its share price."
Amazon shares hit a two-month low Friday of $365. More recently, the stock had fallen 7.4% to $373.13.
Despite the sell-off Friday, Amazon shares remain up about 40% over the past year and trade at a much higher multiple
to earnings than rivals. Amazon's stock is priced about 162 time future earnings, according to FactSet. In comparison,
Netflix Inc.'s multiple is 104 times earnings, Google Inc.'s multiple is 22 times and eBay is at 18.
The Prime price increase would be "a marginal positive for Netflix" because Amazon would cost more than Netflix's$8
monthly fee, J.P. Morgan's Mr. Anmuth said.
Earlier this month, Netflix said it also was considering price changes but that existing members would get "generous
grandfathering of their existing plans and prices." As a result, "there would be no material near-term revenue
Write to George Stahl at firstname.lastname@example.org and Greg Bensinger at email@example.com
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