Amazon’s Advertising Revenue Strength Expected to Drive Growth in 2024, Says BofA Analyst
According to BofA analyst Justin Post, advertising checks for ad spending on Amazon.com Inc (NASDAQ:AMZN) continue to show strength. Skai 4Q marketplace ad spending increased by 48% year over year through November. Post predicts that Amazon’s ad growth in 2024 will be supported by new initiatives, including more ads in Prime Video and the expansion of new ad partnerships.
The robust ad revenue can potentially 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 margins. BofA maintains 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. The recent announcement of a $3 monthly premium for ad-free Prime Video indicates that Amazon will aggressively increase video ads in FY24.
Netflix commentary suggests that an ad subscription can monetize better than an ad-free subscription. If Post assumes that Prime has 150 million Video users and 70% choose lower-cost subscriptions with ads, he estimates a potential incremental ad revenue of $3 billion and total incremental ad+subscription revenue of $4.8 billion.
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 volume (GMV).
Post estimates that Amazon made significant progress with North America margins in 2023, with margins at 3.5% compared to -0.9% in 2022. However, when excluding estimated advertising margin contribution, he forecasts North America retail margins at -0.2% in 2023, still with significant room to grow. Based on Amazon’s commentary and his advertising estimates, Post believes that North America retail margins could potentially reach 7%, well above Street estimates of 5.7% in 2025.
The analyst considers the 130 basis points improvement in Street models for 2024 North America margins (to 4.8%) as 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.
[Original article with image can be found here.](https://cdn.benzinga.com/files/imagecache/1024x768xUP/images/story/2024/01/03/amazon_ads.png)Also Read: Amazon Steps into Green Energy, Pioneering Hydrogen Fuel Production for Sustainable Future
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