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According to the firm, COVID prompted Amazon to double its investments in Fulfilment & Transportation, expanding warehouses and surpassing UPS in delivery scale. Initially, efficiency suffered, evident in declining utilization metrics like Units sold per Square Foot. However, the firm mentioned that Q1 saw significant improvements, anticipating better margins in 2023 compared to 2022.
According to the firm, there is still potential for margin expansion and upside in 2024, driven by (1) Ongoing logistics facility optimization, (2) U.S. Regionalization with hub & spoke model, (3) Increasing advertising business as a percentage of revenue, (4) Rightsizing third-party FBA and consumer fees, and (5) Employing robotics, including the innovative Sparrow package-picking robot, to counter labor inflation.
Furthermore, Morgan Stanley provided its views on Prime Video Ad opportunity, reiterating its Overweight rating and $150 price target.
Amazon is considering adding video ads to Prime Video, with Morgan Stanley estimating base case incremental potential ~$4.8 billion/$2.4 billion of ‘205 Revenue/EBIT (~1%/~4%) from U.S. video ads alone.
Prime Video is currently free with an annual Prime subscription ($139 in the U.S.), and consumers can also subscribe independently for $8.99/month. News reports indicate that Amazon may offer advertising to all Prime subscribers while providing an ad-free option for a higher price.
