Analysis: Amazon still nowhere near its potential
With 38.2% sales growth in the final quarter, Amazon was one of the clear winners over the holiday season. Admittedly this number is flattered by the inclusion of Whole Foods Market revenue, but even when this is stripped out, Amazon still increased sales by an impressive 27.9%. Given this is above the trajectory of recent growth, it is safe to say that Amazon shows no signs of slowing down.
Excluding the impact of Whole Foods, product sales grew by 20.2% overall. While this is impressive and indicates Amazon is gaining market share across many categories, it also underlines the fact that Amazon's primary growth opportunities now lie in services. Prime and subscription revenue, for example, increased by 46% over the prior year. This is an impressive uplift and demonstrates Amazon is pulling more and more consumers into its ecosystem of content and services.
Allied with the increase in Prime membership is the hike in sales of Echo devices. Our data show these were popular gifting and self-purchase items over the holiday period. In our view, Amazon now has a clear edge over other smart device manufacturers. This, and the fact Prime offers far more benefits and services than rivals means Amazon should be able to withstand increasing competition from Apple, Google, and others as they launch and upgrade their smart speakers and connected home products
Growth from services, as well as the addition of Whole Foods, is helping to strengthen Amazon's bottom line. This quarter, net income increased by a stellar 147.8% while operating profit rose by a very respectable 69.5%. This is in spite of increased investment and higher losses from the international operation. Notably, the better profit outcome also masks the pressure on margins from increased delivery and fulfillment costs: These rose by 56.9% over the prior year and as a proportion of product sales rose to 21.7% from 18.7% in the same period last year.
Although Prime revenue offsets some of the fulfillment costs, this income is also used to fund content production, and various other benefits members enjoy. As such, we believe Prime makes only a small contribution to covering Amazon's fulfillment costs. However, over the longer term, we believe this contribution may increase as Amazon starts to raise the price of membership.
Although Amazon has grown sharply, it is still nowhere near its potential. There are categories, like home and apparel, where it is underpenetrated and with tweaks to its proposition should be able to make further gains. There are markets around the world, like Australia, where Amazon is just getting started and has significant scope to boost sales. There are areas, like healthcare, that it is seeking to disrupt in the future. And there is Whole Foods, where some progress has been made -- but which has yet to feel the full force of Amazon's innovative approach. In other words, Amazon has a lot more runway to grow.
In our view, Amazon is now rapidly moving to a company that supports consumers across multiple aspects of their lives. As much as this maximizes growth opportunities, it also comes with two inherent dangers. One of these is the increased risk of regulatory intervention and oversight. The second is a backlash from consumers who could become concerned about Amazon's power. Neither of these is at the tipping point -- but with each innovation and each spurt of growth, Amazon moves closer to these potential problems.
Excluding the impact of Whole Foods, product sales grew by 20.2% overall. While this is impressive and indicates Amazon is gaining market share across many categories, it also underlines the fact that Amazon's primary growth opportunities now lie in services. Prime and subscription revenue, for example, increased by 46% over the prior year. This is an impressive uplift and demonstrates Amazon is pulling more and more consumers into its ecosystem of content and services.
Allied with the increase in Prime membership is the hike in sales of Echo devices. Our data show these were popular gifting and self-purchase items over the holiday period. In our view, Amazon now has a clear edge over other smart device manufacturers. This, and the fact Prime offers far more benefits and services than rivals means Amazon should be able to withstand increasing competition from Apple, Google, and others as they launch and upgrade their smart speakers and connected home products
Growth from services, as well as the addition of Whole Foods, is helping to strengthen Amazon's bottom line. This quarter, net income increased by a stellar 147.8% while operating profit rose by a very respectable 69.5%. This is in spite of increased investment and higher losses from the international operation. Notably, the better profit outcome also masks the pressure on margins from increased delivery and fulfillment costs: These rose by 56.9% over the prior year and as a proportion of product sales rose to 21.7% from 18.7% in the same period last year.
Although Prime revenue offsets some of the fulfillment costs, this income is also used to fund content production, and various other benefits members enjoy. As such, we believe Prime makes only a small contribution to covering Amazon's fulfillment costs. However, over the longer term, we believe this contribution may increase as Amazon starts to raise the price of membership.
Although Amazon has grown sharply, it is still nowhere near its potential. There are categories, like home and apparel, where it is underpenetrated and with tweaks to its proposition should be able to make further gains. There are markets around the world, like Australia, where Amazon is just getting started and has significant scope to boost sales. There are areas, like healthcare, that it is seeking to disrupt in the future. And there is Whole Foods, where some progress has been made -- but which has yet to feel the full force of Amazon's innovative approach. In other words, Amazon has a lot more runway to grow.
In our view, Amazon is now rapidly moving to a company that supports consumers across multiple aspects of their lives. As much as this maximizes growth opportunities, it also comes with two inherent dangers. One of these is the increased risk of regulatory intervention and oversight. The second is a backlash from consumers who could become concerned about Amazon's power. Neither of these is at the tipping point -- but with each innovation and each spurt of growth, Amazon moves closer to these potential problems.