Amazon's (NASDAQ:AMZN) media business, which includes Prime Video, Prime Music, Fire TV, and Twitch, could be worth more than Netflix (NASDAQ:NFLX), Spotify (NYSE:SPOT), Roku (NASDAQ:ROKU), and Alphabet's (NASDAQ:GOOGL) (NASDAQ:GOOG) YouTube combined. Needham analyst Laura Martin pegs its value at $500 billion -- nearly as valuable as Amazon's cloud computing business.
A key piece to Martin's valuation is "hidden value" unlocked by Amazon's expanding presence in consumers' lives. For example, Amazon's management has long said Prime members that use its Prime Video service are more likely to stay subscribed longer, and Prime members spend more on Amazon's marketplace, on average, than non-members. Another factor is that media valuations carry higher multiples than retail businesses, so revenue attributed to the media businesses has an outsize impact on the overall value of the business.
Here's how it all breaks down in Martin's estimates.
Prime Video -- $187 billion
Amazon Prime announced it reached over 150 million subscriber worldwide at the end of January, just less than Netflix's 167 million subscribers as of the end of 2019.
Some 20% of Prime members sign up primarily for the media offerings, according to Martin. The other 80% supposedly get some value from the service, even if it's more passive.
It's a bit confounding how Martin gets a valuation for Prime Video near the market cap of Netflix. Analysts' average price target for the media company put its market cap at $200 billion.
Advertising -- $127 billion
Amazon's advertising business has grown rapidly over the past few years, cementing Amazon as a serious competitor to Google. The advertising business consists of two components: search and display ads on Amazon's website, and digital video ads on Fire TV. The former competes primarily with Google, while the latter is more comparable to Roku. Overall, the ad business generated around $14 billion in revenue for Amazon in 2019.
A $127 billion valuation isn't too high, considering Roku's market cap of about $14 billion with an ad business less than one-tenth the size of Amazon's. Alphabet's market cap is approaching $1 trillion, but Google generates about 9 times the revenue of Amazon. While Amazon is growing considerably faster than Google, it's not clear it has the same potential for scale.
Twitch -- $15 billion
Amazon bought Twitch for about $1 billion in 2014, and now Martin says it's worth $15 billion. The ad-supported streaming platform focuses heavily on gaming, but it's expanded to other niches as well. Still, revenue growth has been disappointing, with the company falling short of ad revenue expectations last year.
Twitch is most comparable to YouTube, which generated about $15 billion in gross ad revenue last year -- 50-times as much as Twitch. What's more YouTube is actually growing faster than Twitch based on Twitch revenue estimates of $300 million in ad revenue for 2019 and $230 million in 2018.
A $15 billion valuation for Twitch would imply YouTube is worth $750 billion. Since Alphabet as a whole is worth about $1 trillion, that valuation doesn't make sense.
Amazon Music -- $3.8 billion
Amazon has over 55 million music listeners. The vast majority of those listeners use its limited streaming capabilities available as part of Prime or use the free ad-supported streaming option available on Echo devices.
So pegging Amazon's music streaming business at about one-tenth the value of Spotify seems reasonable. Amazon theoretically has an advantage when it comes to growing audiences thanks to its leading position in smart speakers and ability cross-promote its streaming platform and its devices. Spotify regularly runs promotions where it partners with Google to offer free smart speakers to acquire premium subscribers.
Still, Amazon's growth has actually lagged Spotify's. It added about 16 million subscribers last year, while Spotify added 64 million, including 28 million premium subscribers.
Hidden value -- $167 billion
The rest of Martin's $500 billion valuation stems from "hidden value." Indeed, Amazon's expansive ecosystem of services often makes each service much more valuable than if it were a stand-alone company. Martin points out Twitch makes Amazon's marketplace more attractive to younger consumers. Martin also notes Amazon's media business provides valuable data it can feed into its advertising business and product suggestions on its home page.
Additionally, Prime Video indirectly supports more purchases on its marketplace by increasing Prime membership retention. It can also support the ad business through higher Fire TV adoption. Amazon Music increases adoption of Echo devices, and Echo owners spend even more on Amazon.com than the average Prime member.
There are a lot of benefits to the ecosystem, and placing an exact value on those benefits is impossible. Meanwhile, most of Martin's estimates for the media assets seem overly optimistic, especially compared to Amazon's closest competitors in each industry. While Amazon's media business might not be worth $500 billion -- more than one-third of its current market cap -- it's still and extremely valuable part, and Amazon wouldn't be nearly as profitable without it.