Ads on Amazon Prime Video will boost profits and send the stock 12% higher in 2024, BofA says

• The rollout of ads on Amazon's Prime Video service is set to boost the stock in 2024, Bofa says.
• The bank said Amazon's profits are set to boom thanks to the introduction of ads.
• "Ad revenue strength has the potential to contribute to our margin upside thesis on the stock," Bank of America said.

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Amazon's upcoming rollout of advertisements on its Prime Video platform is set to boost the e-commerce giant's profits and stock price in 2024, according to a Wednesday note from Bank of America.

The bank reiterated its "Buy" rating on Amazon and its $168 price target, representing potential upside of 12% for the stock. 

Amazon will introduce ads across its Prime Video platform at the end of January. Users can pay an extra $2.99 per month to avoid seeing the ads, or not pay the extra fee and be subject to a few ads per hour of streamed content.

The rollout of ads on Prime comes just over a year after Netflix rolled out its lowest-priced $7.99 per-month advertising tier, which has since attracted more than 15 million subscribers.

A surprise takeaway from Netflix's ad-tier is that it can generate more revenue per user than its premium subscription options that cost upwards of $20 per month, as it collects both revenue from advertisers and a subscription fee from consumers. That dynamic could bode well for Amazon, according to BofA 

"Netflix commentary suggests that an ad sub[scriber] can monetize better than an ad-free sub, and if we assume Prime has 150 million Video users and 70% choose lower-cost subscription with ads, we estimate $3 billion in potential incremental ad revenue," Bank of America research analyst Justin Post said.

That revenue figure could jump closer to $5 billion when considering the portion of subscribers that decide to pay $2.99 per month for no ads.

And while some of that new advertising revenue will go towards content spend for the video platform, a chunk of it will go towards boosting Amazon's profit margins, which should be good news for the stock, according to the note.

"Ad revenue strength has the potential to contribute to our margin upside thesis on the stock, as our analysis suggests advertising revenue will contribute 370 basis points to 2023 North America margins," Post explained adding that combined with efficiencies in its retail business, Amazon has big profit upside in 2024.

That profit margin upside could surprise Wall Street in 2024, as their earnings estimates for the e-commerce giant appear conservative. 

"We believe Amazon's North American retail margins still have significant room to grow with potential to reach 7% based on Amazon's commentary and our advertising estimates, well above [Wall] Street estimates at 5.7% in 2025," Post said. 

Even Bank of America's own projections on Amazon's profit potential in 2024 could be conservative, according to the note.

"We think Street and BofA projections may be conservative given the rate of Amazon's margin improvement in 2023, lack of big investment areas in 2024, and our estimates for close to $3 billion in incremental North American subscription and advertising revenue from Prime Video," Post said.