A recent report from Axios suggests that e-commerce giant Amazon (AMZN 3.43%) is discussing a strategic investment and streaming partnership with Diamond Sports Group, which operates Bally Sports, a bundle of U.S. regional sports networks with broadcasting rights to over 40 professional teams across the MLB, NHL, and NBA.
While nothing is finalized, it's a glimpse into Amazon's overarching media strategy that's steadily become a larger focal point for management. Here's the potential impact on Amazon's Prime business and what it could mean for investors over the long run.
Media is Amazon's next big thing
E-commerce is Amazon's claim to fame. It's the runaway leader in the United States with over 37% share of online sales. Its cloud platform, Amazon Web Services (AWS), is also a leader in its field and the company's primary profit maker. But media could emerge as the company's next big business. Management has actively invested in wading deeper into the media industry.
It acquired media studio MGM for $8.5 billion in 2022, giving it rights to over 4,000 films and 17,000 TV episodes. It then bought the rights to broadcast NFL games via Thursday Night Football. It remains to be seen if Amazon strikes a deal with Diamond Sports, but the company's regional networks are home to dozens of professional sports teams in the MLB, NHL, and NBA.
Media companies make money from advertisements, and Amazon has already become a force there. It wracked up $32 billion in ad sales through nine months of 2023. Adding more live sports content, arguably the crown jewel of media, would naturally draw more eyeballs (and ad dollars) to Amazon's platform. Adding other professional sports content would be a big win for Amazon, considering the NFL season is only a few months long.
Exploring the network effect of Prime
Amazon's media ambitions go deeper than ads, though. Investors often overlook Amazon Prime when considering the stock. They shouldn't. Amazon Prime is a subscription with shipping perks, cloud services, and streaming service Prime Video, which houses Amazon's media.
Amazon's strategy with Prime is a classic network effect. The more value it adds to Amazon Prime, the more likely it is that customers will subscribe (and hold onto their subscription). That's recurring, high-margin revenue. Today, Amazon has an estimated 200 million Prime memberships, which have generated almost $30 billion in revenue through nine months of 2023. More subscribers create more revenue, which Amazon can reinvest to add value, which draws more subscribers, and so on.
The ad and Prime businesses have combined for over $60 billion in revenue as of Q3, nearly as much as AWS. Indeed, these are now significant pillars of an Amazon investment thesis, and Prime is only getting stronger and stickier with consumers over time.
Amazon could monetize this in two ways. First, it could generate more advertising opportunities. Amazon has already become a force in advertising. It's done $32 billion in ad sales through nine months of 2023. Second, it adds more value and appeal to its Amazon Prime membership, which bundles its streaming service with additional perks like shipping for e-commerce orders.
Is Amazon a buy today?
Amazon's stock had a strong 2023, running 80%. Yet shares still seem like a solid deal if you believe Amazon can continue growing over the long term. The company is famous for investing heavily in its business for growth, so valuing the stock on its operating cash flow (profits from Amazon's day-to-day activities) can help investors decide whether to buy shares.
The stock trades at 22 times Amazon's operating cash flow, even after a great 2023. You can see that the stock has rebounded from its lowest valuation in at least a decade, which is now off those lows but still well below its 10-year average. In other words, Amazon is still a solid buy for long-term investors.
AMZN Price to CFO Per Share (TTM) data by YCharts
The future is never promised, but Amazon's core growth prospects seem bright. Between e-commerce, cloud, and Prime, Amazon has become a three-headed monster that should continue creating value for investors for years to come.
