Amazon.com, Inc. (NASDAQ:AMZN) is a company known for taking the long view. CEO Jeff Bezos is famous for willing to forsake short term profits for long term gain. The company will refund money and accept returns in many cases even if the customer doesn’t ask first.
The company strives to keep its costs down and to offer as many services to its customers as possible. Due to the customer-first mode of operation, Amazon has become one of the world’s most valuable companies. Amazon’s stock has risen 31% year-to-date to give it a market cap of over $470 billion. This is despite the fact that Amazon trades for a forward P/E ratio of 129.
Perhaps more than any other segment, Amazon Prime is an illustration of Amazon.com, Inc. (NASDAQ:AMZN)’s willingness to build value by shunning profits in the short term. The service, which provides free two-day shipping to members, costs Amazon a bundle. According to some estimates, Prime’s free shipping perk may have cost Amazon around $7.2 billion in 2016 alone (Amazon reported a net shipping subsidy of $7.2 billion for the year).
Assuming that Amazon Prime has around 60 million members, that translates to a Prime shipping cost of $120 per each Prime member per year. Given that Prime just costs $10.99 per month or $99 per year, Amazon isn’t exactly making any money from the memberships. Factor in Prime’s other costs of added G&A and marketing, and Amazon Prime’s annual fees clearly don’t justify the expense.
Instead, Amazon.com, Inc. (NASDAQ:AMZN) is making money from the activity that Prime members generate. Specifically, due to the fact that Prime members spend an estimated $1,300 per year on Amazon per year, or $600 more than the average non-Prime member, Amazon actually likely turns a profit from the Prime memberships assuming that Bezos’ company makes around a 10% operating margin when adding back shipping costs. Factoring in the life time value of each Prime member and many analysts estimate that Amazon Prime could be worth as much as $60 billion to Amazon. With Prime still growing and drone/robotic tech ahead that will make distribution faster and cheaper, Amazon clearly has a very valuable franchise.