Amazon (AMZN) has soared more than 50% so far in 2023. It’s skyrocketed more than 8x over the last 10 years.
It could go even higher, according to Wall Street. Of the 47 analysts surveyed by Refinitiv in September, 43 rate Amazon as a buy or strong buy.
Investors wanting to buy the stock shouldn’t have a hard time finding a justification for doing so. And Amazon just gave them yet another reason to buy its stock hand over fist.
Adding it up
On Sept. 22, 2023, Amazon announced that its Prime Video streaming service will begin including advertisements beginning in early 2024. The company said that it plans to “have meaningfully fewer ads” than other streaming services and linear-TV providers.
Viewers who don’t want ads displayed when watching Prime Video movies and shows will have a way to skip the ads. Amazon will offer an ad-free option for an additional $2.99 per month for Prime Video customers in the U.S. Pricing for other countries will be released later.
The good news for investors is that this will give Amazon another revenue source that will help the company fund new content. There are two key reasons why this should help Amazon.
First, new content could help make Prime Video more competitive with other streaming services and attract more customers to Amazon’s Prime service. Prime subscriptions generate tens of billions of dollars in revenue for Amazon each year. Second, Prime customers spend significantly more, on average, on Amazon’s e-commerce platform than non-Prime customers do.
Even better reasons
There are even better reasons to consider buying Amazon stock, though. One of them directly relates to the new advertising model for Prime Video.
Amazon has moved aggressively to improve its profitability and free cash flow. The company has closed down less profitable businesses and reduced staff. Adding ads to Prime Video will help offset the high costs of developing content.
Stocks with strong earnings growth tend to go up. Amazon posted earnings of $6.7 billion in the second quarter of 2023, up from a net loss of $2 billion in the prior-year period. That’s the kind of trend that investors like. And it should continue, thanks to the company’s renewed focus on the bottom line.
Amazon has tremendous growth opportunities with Amazon Web Services (AWS). The cloud services platform already ranks No. 1, based on market share. The surge in the adoption of artificial intelligence (AI) seems likely to fuel massive growth for AWS in the years to come.
The company is also using its AWS model of leveraging internal infrastructure to support external customers in other ways. Amazon recently launched a new supply chain service for its selling partners. Analysts at Wedbush think that the service could become yet another significant growth driver for the e-commerce and cloud services giant.
Could Amazon face a potential problem with introducing ads on Prime Video — losing subscribers? I don’t think so. For one thing, the company isn’t raising its price for Prime membership. More importantly, Prime offers many other benefits that help retain members, notably including free shipping.
Some investors might worry that Amazon’s valuation has become frothy after its huge gains this year. The stock trades at a forward price-to-earnings ratio of over 39x, more than twice the level of the S&P 500‘s forward earnings multiple.
I don’t think this is a reason for investors to stay away from Amazon, though. Earnings-based valuation metrics have always been less useful with Amazon than most other stocks. Also, the company’s earnings should grow rapidly over the next few years thanks, in large part, to its cost-cutting initiatives, as well as growth for AWS.
My view is that there are many reasons to buy Amazon stock hand over fist. The new revenue source from ads on Prime Video just adds one more to the list.
— Keith SpeightsWhere to Invest $99 [sponsor]
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Source: The Motley Fool