Amazon is losing money on Prime – and they’re happy with it
Amazon is losing money on Prime and they are pleased about it. Does this mean that losing money is okay? If so, when is it okay to lose money?
Amateurs will say “never,” but the pros know that’s not really true.
In this article, we’re going to take a look at Amazon’s business strategy. But before we do that, it makes sense to look at how well Amazon and its stock have been doing in 2022.
If you’d rather watch the video version, you can play it below or watch it on YouTube. Now let’s get right to it
To keep things as simple and clean as possible, here’s some context:
Take a look at the AMZ stock over the last year. It’s easy to see that the company has had, to say the least, a rough time of it.
But not in the way that most investors thought it would.
Things look pretty bad for Amazon right now. However, you could argue that this is the case for most companies that are traded on the stock market these days.
At the time of writing, the stock had dropped more than 37% in the past year. So, if you put $100 into Amazon a year ago, you now have $63.
That’s quite a fall!
Now, some people might say that’s because of the way the market is right now, which is fair, but competitors like Walmart are also doing well.
Was Amazon a good investment in 2022?
In the short term, the simple and logical answer is no. But let’s not jump to conclusions just yet.
Let’s take a look at their financial statements: The market cap of AMZN stock is $945B at the time of writing this article.
Even though it made $513.98 billion in sales in 2022, Amazon lost money.
Is this part of their long-term strategy, or is it just bad management? Well…it’s a little bit of both.
In 2021, they made $33.36 billion in profit, but in 2022, they actually lost $2.72 billion. That’s bad news for the business and its investors.
One thing to note is that all of the money they made from their business in 2022 came from a part of their company called AWS. AWS stands for Amazon Web Services.
Even though some of their other businesses weren’t doing so well, at least one was still making them money.
In fact, in 2022, all of Amazon’s operating income, or the money they make from running their business, came from AWS.
They made a tremendous amount of money: $22.84 billion.
In contrast, North America and International only made $6.35 billion in operating income in 2021. This is a significantly smaller amount.
When you look at their total income you can see that those branches only made a 1.56% profit.
Overall, it’s good that AWS is doing so well, but the rest of Amazon needs to catch up!
One thing to remember is that the operating income of their subsidiary AWS is much higher than that of their other business segments.
Operating income is the money they make from running their business.
This is because AWS has really high operating margins. Meaning they make a lot of money compared to how much it costs to run their business. Their operating margin was almost 30% in 2021, and it was still very good at almost 29% in 2022.
On the other hand, Amazon’s North America and International segments had much lower operating margins, which means they didn’t make as much money compared to the cost of running their business.
Amazon is burning through a lot of cash – over $26 billion in 2022!
They’re also putting a lot of money into buildings and equipment to help their business grow, which is called capital expenditure.
Because of all of its spending, Amazon is in a lot of debt and it doesn’t take a genius to figure out that taking on a lot of debt is not a good idea.
By the end of 2022, both their total debt and their long-term debt had grown by more than 20%. So, Amazon’s finances are definitely not looking good.
Even after the recent correction, some investors are starting to worry that Amazon might be in a financial bubble. And even though the AWS branch is doing very well, Amazon can’t depend on it to keep them going because it’s not enough.
What are they relying on? How does Amazon plan to become profitable again in the long run?
Amazon Prime could be the answer to this question. So let’s look at their business plan to see if it could be their lifeline in the long run.
For those who have never used it before, Amazon Prime is a service that you pay for. It comes with free shipping and access to Prime Video, Prime Music, Prime Reading, and other streaming services.
Amazon Prime started in 2005 and has more than 200 million members as of 2022. It’s one of the most popular subscription services in the world.
Amazon’s business model for Prime is to provide customers with a comprehensive range of services.
The plan is to make it easier for them to shop and enjoy digital content. Which in turn is expected to create loyalty and drive sales on a longer time horizon.
Over the years, Amazon has made a habit of burning cash for technology and logistics. They made this investment to make sure that customers get their products quickly and reliably. This is a big selling point for the service.
Also, Prime gives you access to a wide range of digital content. This keeps customers on Amazon’s platform and encourages them to buy again and again.
So is this business model profitable for Amazon? Let’s take a look at the following table:
The company’s subscription business grew by an impressive 17% year over year (YoY) in the last quarter of 2022, excluding foreign exchange (F/X) fluctuations.
Compared to the last four quarters, this is a faster rate of growth. In the subscription segment, which is a source of recurring revenue, there is a high rate of Prime membership renewal.
This gives the company a chance to put money into innovative services like logistics, fulfillment, video streaming, and more. During the fiscal year of 2022, the Subscription segment made $35.2 billion in sales.
When you look at it this way, you can hardly say that Amazon is losing money.
At a low double-digit growth rate, this revenue base could potentially reach $100 billion by 2030
The company has a strong competitive advantage over other market players. This is because the subscription segment brings in a lot of money. And this keeps customers within Amazon’s ecosystem of services.
A comparison of Amazon’s subscription business to other membership-based businesses like Costco (COST), Spotify (SPOT), and Netflix (NFLX) shows that this business line is likely to be a big part of Amazon’s overall valuation growth.
With its steady stream of recurring revenue, the subscription business is often seen as one of the best for the company.
Analysts and investors were worried at first about the increase in the Prime membership fee.
But recent growth numbers show that the increase in fees didn’t have a big effect on the number of subscriptions.
This suggests that customers perceive the value of the service to be higher than the fee increase, furthering the growth potential for the subscription business.
The company said in its earnings report that it will spend $16.6 billion on video and music streaming in 2022, up from $13 billion in 2021.
This increase shows that Amazon is burning through a big part of the cash from its subscription income (47% to be exact) on streaming services.
Amazon has an advantage over companies like Netflix, Disney (DIS), and Apple which also offer video streaming services because of its e-commerce business (AAPL).
Although Amazon is technically losing money by reinvesting all of this revenue into its services, over time it could compound into bigger profits
So, Amazon has a stronger position in the market. This makes it even more likely that it can make big investments in streaming services.
But there’s an important catch!
All of this looks good on paper if you look at a long enough time frame. But there is a lot of noise about the Prime membership market being full.
According to research by E-Marketer, more than 60% of US households have a Prime membership right now. This means that there isn’t much left to sell in the US market.
But the company is taking a very aggressive approach to bringing Prime membership to other parts of the world.
To encourage growth even more, the company is putting benefits upfront. This way, customers can get Prime-like services at prices that are competitive.
This strategy makes it easy for Amazon to get into new markets and gives it an advantage over local competitors.
So, Amazon is in a good position to keep growing its Prime membership base around the world. This would help its sales growth in the long run.
After looking at the table, it’s clear that none of Amazon’s competitors offer a membership plan that includes video streaming, music streaming, e-commerce, and other delivery options in a single subscription.
This gives Amazon a substantial competitive advantage over other companies in the market
Also, as was already said, Amazon spends almost half of its subscription income on streaming video and music.
This means that the company can invest more than other big players like Netflix.
As a result, Amazon is in a good position to leverage its unique product and strong financial position. It can improve its streaming services and give it an even bigger edge in the market. This is one of the reasons Amazon is okay with losing money here.
So, if the company’s subscription business grows at a modest rate of between 13% and 15% over the next few years, the company’s annualized revenue is likely to reach the impressive $100 billion mark by 2030.
This projected revenue number is big. And it would give the company an even bigger competitive edge and boost its value.
With this much money coming in, the company could keep investing in and growing its ecosystem of services. This would lead to long-term revenue growth and market share.
The success of Amazon’s most recent original show, which cost at least $500 million for the first season, demonstrates that this is true.
We’re talking about “The Lord of the Rings: The Rings of Power,” which has caused a lot of controversies.
Over 100 million people around the world watched the first season of The Lord of the Rings: The Rings of Power. It’s the most-watched Amazon Original series in all regions.
The series has also been streamed for more than 24 billion minutes, which is, to say the least, a big deal.
Additionally, during its launch period, more people around the world signed up for Prime because of The Rings of Power than any other Prime Video show before it.
This great performance shows how popular the series is and how it has the potential to increase engagement and Prime membership. The increase in membership could lead to significant revenue growth for Amazon in the long run.
All this considered: YES, Amazon might be in a bad spot right now. Amazon might be losing money, but in the long run, it could compound into bigger profits.
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And this is why Amazon is losing money and why they’re happy about it. See you next time!
