Amazon is poised to take a significant leap in profitability and stock value in 2024, thanks to its new strategy of introducing advertisements on its Prime Video platform, according to insights from Bank of America.
Bank of America maintains a bullish stance on Amazon, reaffirming a “Buy” rating with a promising $168 price target. This outlook suggests a notable 12% potential rise for Amazon’s stock, a forecast driven by the anticipated success of Amazon’s ad integration into Prime Video.
At the end of January, Amazon will launch an advertising model for Prime Video viewers. Subscribers face a choice: pay an additional $2.99 per month to keep their viewing ad-free or opt for no extra charge with the inclusion of a few ads per streaming hour.
This move mirrors Netflix’s strategy, which saw the introduction of a $7.99 per-month advertising tier over a year ago, attracting over 15 million subscribers. The interesting revelation from Netflix’s experience is that ad-supported subscriptions can potentially yield higher revenue per user compared to higher-priced ad-free subscriptions, considering the dual revenue stream from both advertisers and consumers. This model could be particularly advantageous for Amazon, as pointed out by Bank of America.
Justin Post, a Bank of America research analyst, estimates that if 70% of Prime Video’s estimated 150 million users opt for the ad-supported tier, Amazon could see an incremental ad revenue of around $3 billion. This figure could escalate to approximately $5 billion when factoring in those subscribers who choose to pay the $2.99 monthly fee for an ad-free experience.
The injection of advertising revenue is not just about top-line growth; it’s also expected to significantly enhance Amazon’s profit margins. “Advertising revenue strength has the potential to contribute to our margin upside thesis on the stock,” Post notes, suggesting that advertising could add 370 basis points to Amazon’s North American margins in 2023. This is pivotal, especially when combined with efficiencies in Amazon’s retail segment, signaling substantial profit growth potential in 2024.
The real kicker is that current Wall Street earnings estimates for Amazon may be undervaluing the company’s potential. “Amazon’s North American retail margins still have significant room to grow,” Post explains, projecting margins could hit 7% by 2025, surpassing current estimates of 5.7%.
In summary, the introduction of ads to Prime Video isn’t just a new feature for subscribers; it’s a strategic move that could significantly bolster Amazon’s bottom line. As 2024 approaches, Amazon’s foray into ad-supported streaming could mark a turning point, potentially surprising investors with higher-than-anticipated profit margins and stock value growth.