Amazon Shares Drop Despite Record Earnings.
Despite record net sales of $35.7 billion, up 22% from last year, or $1 per share, the Seattle-area giant saw its shares drop by more than 13% in after-hours trading yesterday. The reason? Amazon failed to meet the expected earnings target of $1.56 per share. Part of the reason for this is that Amazon’s profit margins are weak. It makes about $0.75 for every $1 it invests. Another part is Amazon’s increasing investment in other areas such as cloud computing, original video series and Prime services, the latter being the bane of FLGS everywhere in the U.S.
The question on the lips of many FLGS owners is, how will this affect sales in my store? The answer is, it probably will not.
Initially, you’d think that as Amazon’s profit margins fall and investors dump its stock, the company might start to reign in perceived costs, such as the free shipping throughout the U.S. enjoyed by its Amazon Prime members. Any FLGS owner can tell you how Amazon’s substantially lower sales price combined with free two-day shipping has cut into their store’s product sales. A more expensive Prime membership or, forgive me for dreaming, eliminating this free shipping service could entice customers to buy more at their FLGS. However, we do not see this happening any time soon.
A closer look at the numbers shows that Prime membership rose by 51%. Analysts estimate that there are 50 million Prime subscribers worldwide, of which approximately 14 million joined Prime in the last year. Many of these members join for the Prime video and Kindle titles more than for the free shipping. This means that their $99 Prime membership goes mostly net into Amazon’s coffers (not discounting for bandwith, etc. for video streaming). At this rate, we do not see Amazon’s free shipping disappearing any time soon.
Also, despite the company’s stock dive, the fact is that it posted record net sales. The fact that the market had over-inflated expectations in a crappy economic environment should not detract from the company’s achievement. While businesses are closing their doors left and right, Amazon is reporting record net sales. Clearly, they must be doing something right – and Prime free shipping appears to be an integral part of that.