Amazon’s Advertising Revenue Expected to Grow in 2024, According to BofA Analyst
Advertising checks for ad spending on Amazon.com Inc (NASDAQ:AMZN) remain strong, with Skai 4Q marketplace ad spending increasing by 48% year-over-year through November, according to BofA analyst Justin Post. Post anticipates that Amazon’s ad growth in 2024 will be supported by new initiatives, including more ads in Prime Video and the ramp-up of new ad partnerships.
The strength in ad revenue has the potential to contribute to Post’s margin upside thesis on the stock. His analysis suggests that advertising revenue will contribute 370 basis points to FY23 North America (NA) margins. BofA has maintained a Buy rating on Amazon with a price target of $168.
In addition to retail efficiencies, Post sees the potential for ad revenue upside to drive margin growth in 2024.
CEO Andy Jassy revealed that $7 billion of Amazon’s $17 billion media content spend in 2022 was allocated to Prime Video content production and licensing. Amazon’s recent announcement of a $3 monthly premium for ad-free Prime Video indicates that the company will aggressively increase video ads in FY24.
Netflix commentary suggests that an ad-supported subscription can monetize better than an ad-free subscription. Post estimates that if 70% of Prime’s 150 million Video users choose lower-cost subscriptions with ads, there is a potential for $3 billion in incremental ad revenue and $4.8 billion in total incremental ad+subscription revenue.
Amazon has signed advertising deals with Pinterest, Meta, and Snap to enhance its ad performance on their platforms. While financial details are limited, Post sees potential for modest expansion in Amazon’s network ad revenues for the Sponsored product deals. The Meta and Snap deals also have the potential to improve the return on investments (ROIs) of Amazon’s ads, boosting gross merchandise value (GMV).
Amazon has made significant progress with North America margins in 2023, with Post estimating them at 3.5% compared to -0.9% in 2022. However, when excluding estimated advertising margin contribution, Post forecasts North America retail margins at -0.2% in 2023, still below the average of 3.0% in 2018-2019. He believes there is significant room for Amazon’s North America retail margins to grow, potentially reaching 7% based on Amazon’s commentary and his advertising estimates. This is well above Street estimates at 5.7% in 2025.
Post considers the 130 basis points improvement in Street models for 2024 North America margins (to 4.8%) to be conservative, given the expected 450 basis points improvement in 2023 and his estimates for close to a 50 basis points contribution from Prime Video.
Post projects FY23 revenue and EPS of $570.67 billion and $4.72, respectively.
As of the last check on Wednesday, AMZN shares were trading lower by 0.34% at $149.42.
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