Valuation Of Amazon Prime

Valuation Of Amazon Prime

Last week, we witnessed two contrasting results from leading global retailers – Amazon and Walmart.

Amazon’s results were extraordinary, and it is confident that it expected a jump in subsequent quarter sales. A big part of this optimism came from its ability to collect higher fees from its prime loyalty subscriptions. Amazon looks to exploit their prime membership by adding benefits to its prime members, like free delivery from Grubhub.

Thus, Amazon prime contributes a more significant value to Amazon’s valuation. Therefore, i decided to value Amazon Prime to estimate how important Prime is to its intrinsic value.

1)As of 2022, Amazon has 200 million prime members.

2)Amazon has increased the prime membership costs globally by 43% ($140 in the US, 70 Euros in Europe and Rs.1,500 in India).

3)Incremental Revenue/member for Prime customers is $800 (A Prime member spends $1,400 against a non-prime member of $600). I assume that the incremental revenues will grow by 10% annually due to increased member fees and the growth in prime membership.

3)Amazon gives free shipping to its Prime members. Thus, these shipping costs get added to its pre-tax operating margin. In June 2022, Amazon’s pre-tax EBIT is 3%, and i assume its pre-tax EBIT from the Prime business is slightly better at 4%, and I believe that Amazon would improve this EBIT to 6% at a steady state.

4)Amazon’s technology and content costs are $65,828 million. I allocate 10% of these costs to its Prime business.

5)Due to high loyalty, Amazon’s prime member lifetime is 20 years, and there is a 96% probability of renewal in membership.

6)Amazon’s service costs to Prime members are 5% of its G&A expenses at ~$12/member. I assume that shipping costs will increase as Amazon grows its Prime revenues.

Amazon

Amazon Value from Prime = Value of Existing Prime Customer + Value Of New customer – PV(Corporate expenses)

I assume that Amazon’s cost of acquiring a new Prime member is $300, and the growth rate in new members is 15% for the next five years.

The corporate expenses will grow at 4% annually to service the existing and new Prime subscribers.

Amval

Value of Existing customers = $149.4 billion
Value of New customers = $143.8 billion
PV of Corporate Expenses = $137 billion

Value of Prime Membership = $156.1 billion

In this valuation, the most significant value driver is the growth in incremental revenue and the subscriber count. With free Grubhub delivery, Amazon wants its Prime members to buy more. Thus, i assume a 10% growth in incremental revenues and 15% growth in new subscribers.

Amazon will settle at 6% EBIT at a steady state as it strives for growth at the expense of margins.

This valuation is conservative as i have not included the optionality of its prime members buying additional products that Amazon intends to introduce in the future. For instance, if Amazon enters banking, its prime members will subscribe to its banking business, thus increasing its overall valuation.



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