Amazon: Watch For Prime Video In 2024
Contributor since 2023 / 578 Followers
Summary:
- Amazon.com, Inc.’s Prime Video service and e-commerce business are experiencing synergistic growth, with increased video streaming leading to more online shopping.
- The success of Amazon Prime Video is driving the next phase of e-commerce growth for the company.
- The integration of Prime Video and the e-commerce platform offers a seamless transition between entertainment and shopping, increasing consumer engagement and loyalty.
FinkAvenue
Investment Thesis
I believe the central argument for investing in Amazon.com, Inc. (NASDAQ:AMZN) heading into 2024 is that their Prime Video service and their core e-commerce business are really starting to see synergistic growth. The use and accessibility of Amazon’s video service push people to stay in (and watch TV) rather than go out, which then results in an increase of shopping via Amazon. While their Prime Video service has been around since 2006, the recent adoption of live sports games provides an even greater reason to have people stay home and shop from their couch.
In return, this behavior is a big deal to Amazon, as this allows the e-commerce giant to get an even better picture on your television data (both what you are watching and how that influences shopping patterns). A report done by Feedvisor in 2021 reported that 57% of consumers were more likely to shop online post-pandemic. Along with that, it found that subscribers to Amazon Prime have risen by 72% among consumers.
In my opinion, Amazon Prime Video is what will be the driver of the next leg up in e-commerce growth for the company. The stock is a buy heading into 2024.
Background
The Rise of Amazon Prime Video in the Streaming Industry
Launched in 2006, the release of Amazon Prime Video was a crucial turning point for the company. Their streaming service is currently one of the leading streaming platforms and by 2022, Prime Video has grown to a subscriber base of over 117 million worldwide. I believe this growth isn’t slowing down anytime soon. Some analysts predict that by 2027 their subscriber base could grow to over 250 million. The success of Amazon’s streaming service (not only in user base but also in content quality) has not been ignored: in 2020 Amazon Studios received 12 Oscar nominations and won two.
A large portion of Amazon’s subscriber base can be found in the United States (where many of their affluent Prime shoppers live). Over 67 million Americans subscribed to Prime Video in 2022, representing a significant amount of the U.S. adult population. The growth of their streaming service can be credited to Amazon’s commitment to expanding their TV show and movie selection.
One key feature of Amazon Prime Video is that some of the content found on their platform is created by Amazon themselves, in content referred to as “Amazon Originals.” Amazon’s investment in this type of content is substantial, in fact in 2020, they spent seven billion dollars to produce and market these shows/movies. Although this investment may seem very large, it has been beneficial for Amazon, such as in 2019 they have released 300 hours of this original content. By doing so, Amazon is growing their content library significantly and appeals to a larger, more diverse audience.
As of 2021, a large increase can be seen in their subscriber count. More than 175 million Prime members streamed TV shows and movies, with streaming hours increasing by over 70% year-over-year. This surge in viewership is likely due to the increase of the quality and diversity of content offered by Prime Video.
A huge leap in Amazon Prime Video’s expansion took place when it gained exclusive rights to “Thursday Night Football.” This 10-year deal is valued at $1.32 billion per year. This allows Amazon to integrate themselves into the market of live sports. These live sports can now be found on their streaming services, which will likely boost subscriptions and revenue.
Why Television Affects Amazon
Since COVID, consumer shopping habits have been shifting. One reason can be attributed to the increase in screen time, more specifically the increase in streaming hours and the decrease in cable TV hours. A large portion of consumers have begun watching content on streaming content such as Amazon Prime Video, rather than their cable TVs. A PwC survey revealed that time spent streaming increased by almost 75% in 2020, with the number of streaming subscribers in the US doubling from an already substantial base of more than 125 million. As mentioned above there may be a correlation between digital entertainment consumption and online shopping. According to Feedvisor, 57% of consumers shopped more online post-pandemic, and 72% were Amazon Prime subscribers.
Streaming services, such as Amazon Prime Video, have become a daily part of many consumers’ lives. In the U.S., 56% of respondents said they visit Amazon every day or a few times a week, increasing from only 47% in 2019. The rise in streaming service use is consistent with the increase in consumer expectations around content variety, ease of use, and personalization. The increase in the favoring of personalization can be seen in Amazon Prime Video subscribers, with 31% of respondents stating that this would be a reason for them to continue with a streaming service.
As discussed previously, the growing use of streaming services by consumers is also shown in their shopping behavior. Amazon’s ability to collect data and consumer habits to provide personalized recommendations and targeted ads is likely enhancing its e-commerce platform’s effectiveness. For example, about 55% of Amazon consumers notice ads on search result pages, and nearly half of shoppers aged 27-40 frequently buy the first product listed on an Amazon search engine results page.
Why this combination is a big deal
Amazon, with the power of seeing a customer’s shopping account and serving them ads in real time has the best feedback loop out there in terms of knowing what content works and what content flops in the world of ads. While Ad use has jumped on the platform, this is intentional. They know how to influence buyer behavior now and they can use this to maximize sales.
As consumer bases grow, content providers need to start shifting their focus to how their consumers search for and access content. In a market where consumers have a wide variety of content and platforms to choose from, this customer-centric approach is essential for content providers. The approach is being used by Amazon’s focus of integrating streaming services with its e-commerce platform. This combination is aimed to offer a seamless transition between entertainment and shopping, therefore increasing consumer engagement and loyalty. I think the power of combining these will be exponential and the benefits only really available to Amazon (besides Walmart+ (WMT) streaming with Paramount (PARA), but I do not believe this partnership will result in the same level of data since many Walmart purchases are in person).
The Power of Amazon Prime Video on Black Friday
Come Black Friday this year, Amazon showcased their powerful partnership between their Prime Video service and e-commerce platform. With more deals over more days, Amazon’s extended Black Friday and Cyber Monday event was huge for consumers, purchasing over 1 billion items. Comparing 2023 to previous years, customers saved roughly 70% more.
This new approach taken by Amazon began in October with their “Prime Big Deal Days,” resulting in an extension of the Black Friday and Cyber Monday events to 11 days. This extension’s goal was to make shopping more convenient and offer greater savings opportunities for customers. Amazon’s Worldwide stores CEO, Doug Herrington, mentioned the ongoing holiday deals, promising millions more deals on a wide selection of products through December 24, along with fast and convenient delivery options.
Not only did this change in strategy offer a wider variety of product selections and more opportunities for savings, but it also leveraged Prime Video’s content. In 2023 the first-ever Black Friday NFL game took place, streamed by Amazon’s Prime Video. VaynerMedia’s CEO Gary Vaynerchuk discussed this with CNBC. I highly recommend checking it out.
By combining the two, Amazon was able to integrate entertainment with shopping and increase viewers to Amazon’s platform during a critical sales period. This resulted in a huge excuse for consumers to stay home and watch Amazon Prime from the couch vs. shopping in-store. Genius.
Valuation
I’ll start by focusing on just the U.S., since the new sport streaming deals have largely started here. Then I’ll go over some of the opportunities internationally.
U.S. Overall Prime Opportunity
As of Q1 2023, Amazon had 167 million Prime accounts in the U.S. Each account costs $139/year (or $14.99/month). In addition, the average American that uses Amazon Prime spends an additional $800/year on Amazon compared to a person who does not have an Amazon Prime account.
Through Amazon’s content strategy (via Prime Video) I believe that Amazon Prime account ownership in the US can grow to 188.5 million by 2026.
Assuming each of these new accounts (21.5 million of them) pays the $139/year for Amazon Prime and each spends an average of $800 more on Amazon this is a marginal revenue increase of approximately $20.2 billion in revenue. This is just U.S. revenue for people buying the full Amazon Prime Video package.
Global Prime Video Opportunity
Globally (as I mentioned before), Amazon Prime Video subscriptions are projected to jump from 117 million subscribers to over 250 million by 2027. While Prime Video costs $8.99/month in the U.S., if we assume a blended rate globally of just $5/month, this produces an additional $7.98 billion revenue opportunity.
Global Amazon Prime Shopping Opportunity
Finally, if we assume global Amazon Prime growth from 200 million accounts to 300 million accounts, this can open up an additional 100 million global Amazon Prime customers (these people will buy Prime, in part, due to Prime Video streaming capabilities). This is account growth internationally, outside of the United States.
If we assume these people spend an extra $400/year on Amazon (½ the extra spend of an American consumer) this will unlock an additional $40 billion in revenue (not even counting the actual Prime membership costs).
Sum of the Parts
Summing this up, ($40 billion, $7.98 billion, and $20.2 billion), Amazon has a revenue expansion potential of $68.18 billion annually. At a forward price to sales multiple of 2.78 (the company’s current forward price to sales multiple) this implies a market cap appreciation of $189.54 billion, or 11.9% upside in stock price (assuming no dilution) from the current market cap of $1.59 Trillion.
Think the Prime growth estimates are too high? Keep in mind that the Amazon Prime subscriber base doubled from 100 million accounts in 2018 to 200 million accounts by 2021. I think ~50% growth in accounts from here is reasonable over the next few years.
Risks to Thesis
Although Amazon’s combination of digital entertainment, via their Prime Video platform, and their e-commerce business has shown to be successful, the e-commerce giant still faces some notable risks. The one I’d like to focus on is data.
In essence, this whole growth strategy relies on data. Better data from Prime Video/stream feeds into more purchases on the Amazon platform. More purchases on Amazon through your Prime account lead to better ads served on Prime Video, etc. It’s a powerful feedback loop.
However, Amazon has been navigating data privacy concerns that could (in part) lead to a successful antitrust action. If regulators are able to break up the company, this could lead to a disruption in data flow meaning this feedback look could be broken. This could impact sales on the ecommerce side and even the effectiveness of Ads served on the Prime Video side (lowering the rate that they can charge for these ads).
I remain optimistic, however. The FTC has had a low success rate recently with Antitrust action and is facing a brain drain. As long as Amazon is able to successfully navigate through these challenges, the future of their combination of their e-commerce platform and streaming service is promising in my opinion.
Bottom Line
Amazon’s further integration of Prime Video with its e-commerce platform presents a compelling investment opportunity. Their ability to engage consumers through their streaming service and then seamlessly transition them to shopping on their website is a powerful tool that sets them apart from their competitors. While data privacy risks and Antitrust threats are on the horizon, I’m optimistic that the company will be able to navigate. As such, I think the company is a buy and a compelling pick for 2024. As Matthew McConaughey says, “Data is the new gold.” I think Amazon has just the right pickaxe to mine it.
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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in AMZN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Noah Cox (account author) is the Co-Managing partner of Noahs' Arc Capital Management. His views in this article are not necessarily reflective of the firms. Nothing contained in this note is intended as investment advice. It is solely for informational purposes. Invest at your own risk.
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