Shares of Amazon (AMZN) are getting smacked again early today after the company was downgraded from "Buy" to "Neutral "with a $375 price target. UBS analyst Eric Sheridan said a survey of Amazon customers indicated that only 24% would renew their Amazon Prime memberships if the company raised the annual price to $119 from the current $79. During its most recent conference call Amazon executives hinted that they were considering hiking the price of Prime membership anywhere from 20 to 40%.
While Amazon doesn’t share details, analysts estimate anywhere from 20 to 25 million are currently signed up for Prime.
Sheridan says his team was negatively surprised by the results. The implication of higher than expected price sensitivity is that Amazon would be forced to add more features and benefits to retain users. If you buy into the idea that the UBS / Consumer Intelligence Research Partners (CIRP) figures are accurate, Amazon’s costs would rise, further pressuring the online king’s already thin margins.
The problem is the survey is almost certainly wrong. When customers are asked whether they would be willing to pay more for an existing service they say no. The reality is the switching cost from dumping Prime and entering the Wild West of online retail makes the probability of quiting Prime over a marginal price hike much lower than surveys would indicate.
It’s not so much that CIRP conducted its data incorrectly. The problem is in the basic premise. As CostCo (COST) as proven over the years with its ability to hike membership fees without incurring significant attrition, consumers are willing to pay more for a service when the alternative is changing their habits. It’s simple human nature.
Which isn’t to say Amazon doesn’t have problems. Realizing CEO Jeff's Bezos dream of becoming the world's number one merchant will require more distribution centers, warehouses, customer service centers and will mean starting from scratch on an infrastructure to support same-day delivery services. As employment in the private sector ramps towards all-time highs that build-out is going to be get more expensive. The company is also facing increasingly desperate traditional merchants who have provided almost no competition whatsoever over the last 15 years.
Finally there’s the issue of the stock, which is down about 14% from all-time highs and sitting on support at about $350. Should shares of AMZN close meaningfully below that level, a trip to the $300 area isn’t out of the question.
I own Amazon shares and added to the position after the company missed earnings. $350 is support. There are at least 99 things that worry me about the position but the idea that customers wouldn’t be willing to pay an additional $20 for 2-day shipping, free streaming service and at least half a dozen other benefits related to being Prime members simply isn’t one of them.