Amazon Is in Prime Position for a Holiday Season Triumph

By Alex DUMORTIER, CFAFool.com

Blame post-holiday lethargy: It's the last week of the year, and U.S. stocks are lower in early Monday afternoon trading, with the Dow Jones Industrial Average and the S&P 500 down 0.45% and down 0.56%, respectively, at 12:15 p.m. EST. Shares of Amazon.comare outperforming, up 0.70% after the e-tailing behemoth issued a long press release describing what appears to have been a hugely successful holiday shopping season.

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Amazon fulfillment center. Image source: Amazon.com.

What a year it's been for Amazon! The company's shares have more than doubled, for a current market value of $311 billion, making it the 6thlargest U.S. company (up from 27that the end of 2014).

That advance is not just the product of investor enthusiasm: Early results from this holiday shopping season suggest the underlying business momentum is terrific.

Last week, this column highlighted some of the signs that Amazon is preparing to enter the delivery market. With the e-tailer reporting that over three million people joined Amazon Prime in the third week of December, it's worth taking a quick look at this remarkable innovation.

(Amazon Prime is the company's "all you can eat" two-day shipping program, but it also includes Prime streaming video and a number of other services. Full disclosure: I'm a very satisfied Prime member.)

Amazon launched Prime almost 11 years ago, in February of 2005. That month, according to BusinessWeek, CEO Jeff Bezos laid out the rationale behind the service at the Churchill Club, a Silicon Valley business and technology forum:

It may be difficult to imagine from our current vantage point, but back in 2005, even people who were already buying a lot of books, music, and video on Amazon weren't aware that it also sold electronics:

In its first month, "tens of thousands" of customers signed up for the service. A decade later, four out of five of those early joiners remained members under their original account. That equates to an annual churn rate of just 2.2% (these were Amazon die-hards, mind you, but there is good reason to believe the renewal rate in the U.S. is at or above 90%, perhaps even 95%).

Amazon discussed Prime in its last annual report(my emphasis):

Despite the company's outlook for the net cost of shipping, as a percentage of net sales, that cost has remained stable over the past several years: 4.7%, 4.8%, and 4.7% for 2012 through 2014. For the nine months ended Sept. 30 of this year, the ratio was 4.8%, down from 5% over the same period last year.

Prime has met -- or, more likely, exceeded -- its original expectations: By one estimate, the average Prime member spends $1,500 annually, more than double the spend of an ordinary customer. It's just one of the innovations that has made Bezos the Sam Walton of the Internet generation.

The article Amazon Is in Prime Position for a Holiday Season Triumph originally appeared on Fool.com.

Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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