Over the past two days, headlines have been flooding my newsfeed regarding Amazon’s decision to…wait for it…wait for it….RAISE THE PRICE OF AMAZON PRIME!
Oh no! Say it ain’t so, Bezos. Say it ain’t so.
Amazon Prime’s New Price Tag Is The End Of The World
The e-commerce Goliath (without the glandular issue) , announced that it is raising the cost of the premium service it offers to a mind-boggling $119 a year. A 20% rise!
Sarcasm 101: No This price drop isn’t the end of the world.
Despite closing the day up yesterday, (+54.66, or +3.6%) at 1572 .62, $AMZN was well off its’ high of 1638.10 at open.
But why? Mostly that headline to be honest. The primary one in the thinkorswim news feed, a piece over at MarketWatch titled: “Is Amazon Prime worth its new $119 price tag?”.
It’s interesting to note that the most recent article MarketWatch has put out re: Amazon has changed its’ tone.
Most likely to impact sentiment. Beyond most retail traders only reading headlines, many simple news-based algorithmic trading system simply try to gauge the sentiment of the headline and a few opening lines. Or maybe it’s just honest conflicting journalism. Hmm…
The former article reads like this:
Some members only use a fraction of the Prime services on offer.
Then we got this…
So now the increase in price “should add even more its coffers”.
To The Chart-Mobile!
If you read my article on the “First Candle Indicator‘, you should notice something off the bat.
Namely, that the first candle is of a bullish nature and was well above any other volume throughout the day. Which bodes very well for the stock.
A look at the Chaikin Oscillator (an indicator of buying or selling pressure), we can see that right after that big volume of the first candle, the slope of the oscillator’s decent dramatically changed from nearly vertical to a more smoothed reaction.
Then turn your eyes to the On Balance Volume (an indicator of accumulation [buying] in a stock vs. distribution [selling]). Notice that despite the drop at open, the on balance volume actually ended up higher than it did before the session started. This would imply that more of the stock was purchased than was sold.
Yet the Money Flow was negative on the day (-864.37 million dollars according to the Wall Street Journal [my other data sources are within a tight range of that figure also]) and the Chaikin Oscillator shows that us as well.
Beyond Technical Analysis: Narratives
If you’re familiar with my writing or have been around my trading rooms, you’ve definitely heard me speak of narrative before.
So what do those news stories tell me when I look at the stock’s behavior as well as how the tone of those articles changed?
Well, Amazon had a huge earnings beat. If you’ve had bought the stock two earnings reports ago, In October of 2017, you’d be u[ 50% on the equity. I think the early selling was plain and simple profit taking. And after it dropped under $1600, the “Is Prime Worth It?” narrative started to be pushed more prominently so a lot of the selling in the stock was retail and simple algos (through, more or less, the same logicalsteps) hastening to get rid of equity.
Which is fine for retail, professionals, algos, anyone really…taking profits is great. I recommend doing such whenever possible.
But that doesn’t necessarily mean you should take all of them.
I’ve owned Amazon equity for a pretty long time and I do sell some of it sometimes, only to buy more back after it seems to be through a period of consolidation. I usually do that via LEAPs also to manage my upfront capital risk. If I buy ATM LEAPs on a stock I want to own that 6 months or however dated those LEAPs are, if the stock has moved up the way I hoped it would I can exercise at the lower strike of my options and keep my equity cost basis low. If I was wrong and the stock heads south before expiry I can get out with far smaller losses. Or of course, I could sell the options at a profit as well.
The switching narratives of the mainstream financial media, would have me inclined to believe that for the most part, it was indeed profit taking. Even The Journal‘s money flow data tool (linked to above) calls it “Selling On Strength”.
But Most Importantly, Common Sense Tells Me This Price Hike Means Nothing
It’s not exactly a new business model. Recent examples include NetFlix ($NFLX) and Microsoft ($MSFT).
- NetFlix has announced several price hikes over the years, with two notable ones I can recall off the top of my head.
- Each time it did so, the stock responded negatively. Look at it now. Record subscribers and expanding subscriber growth.
- When Microsoft entered the console gaming space. they priced the XBox at a loss per unit sold. This was before the sophistication of today’s cloud gaming or even digital download options. They were banking on the cheaper pricing driving adoption rates to the console so they could they could make a killing off the margins they’d likely earn off selling games. So the plan was to take an upfront hit to boost long-term profits. It worked. Beautifully.
Actually, Amazon itself has used this tactic before with things beyond Prime, taking losses within the Kindle Store to keep more users engaged with the site.
Like a good drug-dealer (think business-wise, not ‘bad hombre’ morality things), they gotta give you their best stuff first…or a little sample of sorts to keep you coming back.
Here are some things about Prime though…
- OF COURSE IT SHOULD COST MORE. Are you guys serious? If you were to pay for one month of Prime, the shipping savings alone on a single physical good could easily cover the entire cost of that month.
- Speaking of which, President Trump should be praising this move. If anything, it might even give Amazon a tiny amount of money (per user, per-package, not total) to pay higher shipping rates with USPS. Though being one of the primary if not the biggest USPS customer for packages, such (potential) praise is irrelevant.
- Prime subscriber numbers being released before the earnings report and before the price hike announcement was a very well orchestrated move, essentially tipping their hats to those paying attention. Why?
- Prime Memberships hit an all-time high last quarter, surpassing 100 million members, obviously implying a continued demand in the memberships. That same quarter saw revenues increase 43% year-over-year, from $35.7 billion dollars to $51 billion.
- So despite the growth and sustained demand of a product it loses money on, it still made more than $15.4 billion dollars than it did in the comparable quarter from last year.
- Sensationalism Is Stupid.
- Note the first MarketWatch article uses the annual membership rate to cite the price increase.
- How about this?
- $119 represents a 20% increase in price, or $20 dollars per year of an increase.
- $20 per year spread over 12 months is $1.67 per month. I’m still getting my packages cheaper with that $1.67 extra. Plus I can use Kindle Unlimited to read a ton of books for free, watch movies/tv shows, etc.
- So all that’s really being said is the cost is going u by $1.67. The Fed’s Rate Hikes over the next year will have a vastly more important totality on any of our wallets than that.
- New members can still lock in the $99 rate if they sign up before May 11th, 2018.
- Existing members can renew at the $99 annual rate if they do so before June 16th, 2018.
- College kids still get their free/discounted rates, so that’s cool. Cool for the typical college kid who $2 a month might actually make a material difference to. But not really, even with new pricing applied (which it won’t be for them), skip a beer a month and 5hey’d be fine. And yes, I love beer and I know how precious the concept of one can mean at the right moment. Still, I think you’d be ok with the savings Amazon can provide versus most on-campus bookstores for that matter.
I must apologize. I didn’t mean for this article to be so long. I think every mention of the impact of this price raise I’ve heard has driven a good 100 words or so at least.
But I’m not really that sorry. Consider it another lesso regarding how to treat financial media. Or financial musings, my own included. That, and a reminder that common sense and clear thinking is a far better indicator than anything you can throw on a chart.
Have a good weekend all, though I have the feeling this isn’t the last time you’ll hear from me before Monday.
Today In History: April 28th, 1945 – Mussolini was executed.
Don’t worry about the situation over in Italy though. It’s only been two months after completing their general elections and still not having a government in place. Such unrest in Italy has never been a bad thing. Oh. Wait. Nevermind.
But it’s the weekend, so as long as you’re still reading…let’s remain optimistic. Makes for a way cooler featured picture anyway.
April 28th, 1916 – Ferruccio Lamborghini Was Born
100 years later, in 2016, the company he founded released the Centenario in his honor. Enough said.