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UBS: Almost everything Amazon does is about improving its best product

Business Insider | Jul 18, 2017, 12.00AM IST

Amazon Prime

Amazon

Amazon has one secret weapon, and everything the company does is an attempt to make that weapon better, according to one analyst.

"Amazon's strong Prime membership growth represents one key pillar of Amazon's long-term business model," Eric Sheridan, an analyst at UBS, wrote in a recent note. "In combination with increasing FBA traction (i.e., 'Fulfilled by Amazon'), Amazon has created a powerful flywheel effect and 'sticky' ecosystem that is likely to be supportive of a high teens revenue growth CAGR ('16-'21) over the next few years."

UBS completely reformatted how it evaluates Amazon's business, in part, to better factor in the multiplying effect of Amazon Prime subscriptions. Sheridan mentions several growth opportunities in his note, and all enhance the success and growth of Prime subscriptions. These opportunities include advertising, Fulfillment by Amazon, streaming video and more.

Prime subscriptions are the company's secret weapon because Prime subscribers are incredibly loyal.

Almost half of Prime subscribers spend $800 or more at Amazon, and 74% of Prime customers shop with Amazon at least twice a month, according to a recent survey. This means once a customer buys into Amazon's Prime offering, they are really loyal to the service.

Sheridan says global prime subscriptions will continue to grow through the year 2020, increasing the number of people who are loyal to Amazon. This will certainly help Amazon sell more products, but it can also monetize those Prime users through advertising. Loyal customers will show on Amazon's platform more often, which increases the number of ads Amazon can sell, according to Sheridan.

amazon prime

Rafi Letzter/Tech Insider

Amazon can also increase its revenue from its Fulfillment by Amazon service. Retailers are able to hand over the shipping hassles of their business to Amazon through the service. The company will store, pack and ship products for other retailers for a fee. As more loyal Prime customers place ever increasing orders, more packages will be shipped and Amazon's fulfillment service could grow in tandem.

Sheridan says that even Amazon's recent move to buy Whole Foods will be benefitted by Prime. The new acquisition will allow Amazon to grab a larger share of its Prime customers' monthly spending. Groceries are currently the highest untapped market for Amazon, according to data from UBS.

Even Amazon's spending on entertainment and streaming video can help drive more customers to become Prime members in order to have free access to the content. Amazon was recently nominated for 16 Emmys for its original TV programming.

The only service that it's hard to see benefitting from increased Prime members is Amazon's Web Services business. The cloud computing and storage platform is hugely popular. UBS estimates that Amazon will bring in $4.13 billion from its Web Services platform this year. It also estimates that Amazon will see a more than 20% annual growth rate for Web Services through 2020.

UBS raised its price target to $1,200, which is 19.72% higher than the company's current share price.

Amazon has risen 33.92% this year and broke through the $1,000 price milestone after its Prime Day holiday.

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