The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology  – Senior Analyst at I Know First. 

Amazon Stock Forecast

Summary:

• Amazon’s stock price dropped by more than 7% this October. I say it is a good buy-on-the-dip opportunity.
• I am not worried about the Q3 earnings miss. Amazon’s core business model is to prioritize revenue growth over EPS.
• The launch of Amazon Prime in China is another master stroke move from Jeff Bezos. China is still the biggest growth driver for retail e-commerce.
• Giving away Prime Membership accounts for just 388 Yuan/year ($57) could help Amazon compete better with Alibaba and JD.com.
• Amazon’s stock has buy signals based on its algorithmic forecasts.

China is still the world’s largest market for retail e-commerce. I am therefore delighted that Amazon (AMZN) finally launched its Prime member ship program in the Middle Kingdom. China’s retail e-commerce industry will process $899.09 billion worth of goods this year. Even though it has little than 1.5% market share in China, Amazon Prime could be a game-changer.

Amazon’s offer of 388 Yuan/year ($57/year) for Prime could attract customers away from Alibaba (BABA) and JD.com. There are no free access to Amazon Music or Videos but Amazon is offering free cross-border shipping of goods (minimum order of 200 Yuan or $29) to Chinese members of Amazon Prime. Meaning they could order goods available in Amazon Global Store and Amazon will deliver them for free inside China.

The Prime membership program is the growth driver for Amazon. I expect Chinese Prime members to also become long-term, repeat customers of Amazon China and Amazon global. The free shipping perk in the 388 Yuan Amazon Prime China program will likely follow the successful trend of the U.S. Amazon Prime membership program.

U.S. members of Prime spends more than 3.5x on Amazon’s online marketplace than their non-Prime member counterparts.

Patience Will Eventually Pay-Off

I do not expect Chinese Prime members to spend an average of more than $1k immediately. However, Amazon will likely double its business in China by offering Amazon Prime membership. Building relationships with Chinese customers require Amazon to be patient and generous.

The most important thing now is for Amazon to double its 0.9% share in last year’s Chinese Business-to-Consumer e-commerce Gross Merchandise Volume ((GMV)). Alibaba’s Tmall had 58% share in B2C online shopping GMV. JD.com’s share last year was 22.9%. It is my firm belief that given enough time, Amazon could break the duopoly of Alibaba and JD.com in China.

Giving away free cross-border shipping for goods worth just $29 is one of the many sacrifices that Amazon must endure. The Chinese customers will eventually learn to appreciate Amazon. Building long-term relationships with Chinese e-commerce customers is more important than losing a few dollars on every transaction in Amazon China.

Free shipping and other perks is why Amazon has more than 63 million U.S. Prime members. Freebies were a necessary evil that eventually helped Amazon U.S. build a massive pool of loyal, repeat customers.

It is my fearless forecast that Amazon Prime’s success in America could be replicated in China. I expect Amazon Prime China to have more than 3 million members within the next 12 months. The potential economic benefit of having 3 million Amazon Prime China subscribers is easy to guesstimate.

If we presume that Chinese Prime members could spend an average of $500 per year, Amazon could increase its China sales by $1.5 billion. Losing $30 million/year on cross-border shipping costs is a small price to pay in exchange for a bigger share of the Chinese e-commerce industry.

Amazon’s Increasing Costs Is Part Of Its Strategy

Some investors might be put-off with Amazon Prime’s launch in China. We all know that the freebies and bonuses of Prime membership is a big part of Amazon’s growing operating expenses. The free shipping perk alone is forcing Amazon to allocate more budget to build more warehouses and vehicles to deliver goods more efficiently to Prime members.

Quarterly increases in operating expenses should be lauded. It shows Amazon is not being stingy when it comes to investing in the future.

AMZN’s stock price dropped more than 5% after it reported its Q3 earnings last week. However, I see it as a welcome opportunity to buy the stock on the dip. I still believe that Amazon’s huge spending is all about growing the number of its happy loyal customers.

Amazon’s earnings miss in Q3 is overblown. After so many years, many investors and analysts still expects Amazon to deliver EPS estimates every quarter. Let us be reminded that Amazon’s core business strategy is to just keep growing its number of customers and revenue.

Amazon’s growing fulfillment expenses is just it planting the seeds to propagate its empire. We just need to appreciate that Amazon’s Q3 performance delivered 29% year-over-year growth in revenue. North America sales grew 25%. International sales grew 28%. Amazon Web Services also posted a year-over-year growth of 55%.

As long as Amazon can deliver consistent growth in revenue, it remains a great long-term investment.

Conclusion

Amazon’s stock has dropped by more than 7% this October. This was largely because of the negative reaction to its increased spending during the Q3 period. Take advantage of this dip to acquire more AMZN shares. I expect AMZN to eventually rebound to $800++ before November ends.

Going forward, I expect Amazon to gradually increase its market presence in China’s $899 billion/year e-commerce trade. Amazon Prime is going to help Bezos’ company compete better with Alibaba and JD.com in China.

The 3-month and one-year algorithmic forecasts are also very favorable to AMZN. I expect AMZN’s stock price to drop further this week. However, Amazon’s stock should be back above $810 before 2016 ends. I am long AMZN and I plan to add more.

I Know First Past Success With AMZN

I Know First has been bullish on AMZN in past forecasts.  On May 17th, 2016, an I Know First analyst had written a bullish article regarding AMZN and its possibility in becoming the multi trillion dollar company. The algorithm had been bullish regarding AMZN, and as a result the stock has risen over 11% to date.

Additionally, on February 10, 2016, an S&P 500 companies forecast was published showing AMZN had risen 14.93%, since the forecast was sent to I Know First subscribers on February 10, 2016.

These forecasts were sent out to current I Know first subscribers on May 15th, 2016 and February 10th, 2016 To subscribe now click here.

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