3 Billion More Reasons to Buy Amazon Stock

The e-commerce behemoth's web is about to expand a little more. Read More...

The e-commerce behemoth’s web is about to expand a little more.

Investors keeping tabs on Amazon (AMZN 0.58%) likely already know it’s now waist-deep in the advertising business. In 2023, it collected a total of $47 billion from third-party sellers looking to feature their products more prominently at Amazon.com. That’s a $10 billion improvement on 2022’s tally, and nearly one-tenth of last year’s top line. Not bad.

With this particular business’s growth finally starting to slow, though, the e-commerce giant is revving up another growth engine. It’s still an advertising venture. But this time the medium is video. A handful of pros believe the television commercial market could be worth $3 billion to Amazon, although this expectation may actually understate what’s in store.

Amazon dives into the deep end of the advertising pool

You read that right. Amazon is now in the television advertising game. In January, it finally added an ad-supported tier to its Prime streaming service. Any Prime member looking to avoid these video ads must pay an additional $2.99 per month.

It wasn’t exactly a shocking move at the time. Most other streaming services now offer ad-subsidized options, as the cost of content is growing faster than consumers’ budgets.

What is shocking, however, is how seriously the company is taking this business. Just last week, Amazon made its first-ever appearance at this year’s so-called “Upfronts,” where traditional television names like Walt Disney and NBCUniversal tout and then — hopefully — sell television commercial time to advertisers. Increasingly, of course, streaming video ads are displacing commercials airing on traditional cable platforms. Still, the company’s presence at the event turned heads.

But how much of this ad revenue could Amazon win over? It depends on whom you ask. Market research outfit Omdia believes Prime Video will do $2 billion worth of advertising business this year. Analysts with TD Cowen put the figure at $3 billion.

Both outlooks, however, may understate what’s actually in store given the past and projected growth of the ad-supported streaming market.

AVOD is now fully in the mainstream

While at one point you might have been a cable TV customer, statistically speaking, now you’re not. Data from Leichtman Research Group suggests that less than half of all U.S. households are still paying for linear cable television service, echoing numbers from eMarketer.

Where are they going? It’s not tough to guess. These people are replacing cable with a collection of streaming services like Netflix, Disney+, and the aforementioned Amazon Prime. Consumer-tech market research outfit Parks Associates indicates the average American household now pays for an average of 5.6 streaming services.

Not all of these services are ad-free, however. In fact, most of them aren’t. Reflecting efforts to defray the ever-rising costs of streaming subscriptions, Parks adds that half of U.S. households now regularly use an ad-supported streaming service. These numbers will only grow going forward as these platforms improve and household budgets are stretched.

Advertisers are, of course, following the crowd wherever it goes. That’s why Coherent Market Insights believes the worldwide, ad-supported, video-on-demand (or AVOD) market will more than double in size between last year and 2030, when it will be worth $71 billion. North America is and should remain the world’s top AVOD market, accounting for nearly 40% of this business.

Given Nielsen’s numbers indicating Prime is the United States’ second-most-watched ad-subsidized streaming service — second only to Netflix — it’s not a stretch to suggest that Prime’s 115 million U.S. customers leave Amazon in good position to capture a large share of the ad-supported video market’s growth. A similar situation applies outside of the U.S.

The kicker: Amazon can offer its advertisers a treasure trove of digital data about the people watching Prime’s programming, allowing ads to be far more effective than they’d ever be airing on traditional cable television.

Indirectly bullish for Amazon stock too

Given the size of the domestic and global ad-supported video market, $3 billion worth of additional ad revenue seems pessimistic. Indeed, it seems unlikely Amazon would bother unless it wasn’t certain it could reap considerably more than $3 billion per year by tiptoeing into the television commercial arena.

Just for the sake of argument, though, let’s say TD Cowen’s figure is on target. Even then, there’s a clear additional fiscal benefit to Amazon’s foray into this new business. That’s retention of the company’s top e-commerce customers. See, Prime members are estimated to spend about twice as much at Amazon.com as non-Prime shoppers do. Making it more affordable to remain a Prime member would be a wise investment on Amazon’s part even if it wasn’t going to add any additional advertising revenue.

The company is, however, going to see at least some revenue from Prime’s nascent advertising business. So, connect the dots. The case for owning Amazon stock was already pretty good. Now, it just got a little better.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Netflix, and Walt Disney. The Motley Fool has a disclosure policy.

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