Outlook: Amazon Prime Faces Headwinds After Net Neutrality Ruling

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Q4:13 revenue missed from lower-than-expected electronics and other general merchandise sales and foreign exchange headwinds. Revenue was $25.6 billion, compared with our estimate of $26.0 billion and the consensus estimate of $26.1 billion. GAAP EPS was $0.51, compared with our estimate of $0.81, and the consensus estimate of $0.66. The company provided Q1:14 guidance for net sales of $18.2 – $19.9 billion and operating income of $(200) – $200 million.

Amazon (NASDAQ:AMZN) had its best-ever holiday season in 2013. Amazon set records in several areas, including a record number of Amazon Prime items shipped worldwide on Amazon’s peak shipping day, record Cyber Monday weekend sales of Kindle Fire tablets and Kindle e-readers, and a record 36.8 million items ordered worldwide on Cyber Monday. The company suspended accepting Prime members during the holiday because it couldn’t process orders quickly enough, and common carriers had trouble delivering orders on time due to unforeseen demand.

We believe Amazon will consider raising the price of Prime membership by $20 – $40 annually to offset increased usage of Prime and higher fuel costs. We estimate that there are 25 million Prime members; the proposed increase would add roughly $500 million to $1 billion to revenue and operating profit, as it would require no additional expense. We think attrition in Prime members from a price increase would be minimal, but have not yet included an increase in our model.

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