Morgan Stanley note on Amazon's streaming ambitions points to reasons we own the stock

Published Mon, Aug 15 20222:01 PM EDT

Analysts at Morgan Stanley provided a brief update on Amazon 's (AMZN) streaming initiative over the weekend, highlighting the company's NFL Thursday Night Football contract . As a reminder, Amazon previously signed an 11-year deal to stream 15 Thursday night games and one pre-season game each season. The Morgan Stanley note also noted the upcoming Prime series "The Lord of the Rings: The Rings of Power," which is set to be released on Sept. 2. The analysts expect the NFL deal to result in incremental costs of $820 million in 2022 and $860 million in 2023, with that number increasing over time and averaging out to about $1 billion per year over the 11 year timeframe. As for "The Lord of the Rings," or LoTR for short, the analysts estimate that spending here will amount to roughly $140 million in 2022 and $230 million in 2023 — largely in the second half due to the timing of the season premiers. So, combined the analysts see total content cost at Amazon rising to about $16 billion in 2022 and $20 billion in 2023, exceeding Netflix 's (NFLX) roughly $14 billion 2022 budget and $15 billion 2023 budget. The question for Amazon investors is: Do these investment makes sense from a return on investment (ROI) perspective? Regarding the NFL deal, the analysts expect the direct revenue benefit to be "likely small" with the bulk of the returns coming in the form of advertising sales. In an attempt to quantify the advertising revenue, the analysts noted that the firm's media team previously estimated Fox's advertising revenue at about $30 million per game, adding up to somewhere in the range of $450+ million for the season. In some ways, advertising has to be the play for the NFL contract because Amazon is also streaming the games on its free streaming platform, Twitch. But again, this allows Amazon an opportunity to more directly target advertisements than others could and therefore provides the potential to charge more for ads. As for LoTR, seeing as this will be a part of Prime Video, which is bundled into Amazon Prime, there is no real direct revenue benefit. Of course, $450 million+ in sales on a nearly $1 billion NFL expense sounds pretty unattractive. That said, there are two factors to consider. First, Amazon may be more able to direct advertisements and build up a better performance-based ad model that is linked directly to transactions and therefore justify a higher price tag for placing ads than Fox did. Second, and more importantly, these investments help to increase the value proposition of the Amazon ecosystem. This buildout comes at a time when Amazon's competitors simply are not in a position to allocate additional investment dollars to video content or other growth initiatives. Disney 's (DIS) content spend will likely remain flat — though as members know, they have a lot in the pipeline for Disney+ that we are excited about; Netflix is moderating spending growth; and retailers like Walmart (WMT) and Target (TGT) have enough to worry about without streaming as supply chain bottlenecks and input cost inflation pressure profit margins. On the other hand, Amazon's e-commerce side already took the margin hit when it overbuilt capacity in 2021 and is now set to see profitability improve as it grows into that excess capacity. We have previously said that unlike Netflix or other streaming services, Amazon and Apple (AAPL) are not required to look at streaming video content as the end all be all of their subscription services and instead have the luxury of considering them in the context of selling a bundle. (Disney also has its Parks and Experiences business to offset some losses in streaming.) Remember, Amazon just needs to add some value here and there to enhance the offer of its Prime subscription overall so that it can ultimately raise the price every few years with little risk of increasing churn. However, the importance of video within this bundle is still important. In fact, according to the Morgan Stanley analysts, Prime Video ranks as the second most important feature of the Prime subscription package, behind free two-day shipping and ahead of both free same-day shipping on select items and low prices. As a result, the analysts — and we agree — believe that the most appropriate way to view this increased spending on content is through the lens of "retention spend" and in some ways a research and development cost. One last thing to note, while we haven't seen much of it yet, the greater Amazon's content offer, the greater the potential for the company to eventually offer up a broader so-called t-commerce platform, a concept in which goods are sold directly via TV screens. Imagine, as the NFL game MVP is announced, an option pops up allowing the viewer to purchase that player's jersey. The concept was previously discussed by Amazon Studio COO Albert Chang during a panel hosted by the Interactive Advertising Bureau in 2021. (Jim Cramer's Charitable Trust is long AMZN, AAPL and DIS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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General view of the NFL Shield logo on the field before Super Bowl LV between the Tampa Bay Buccaneers and the Kansas City Chiefs at Raymond James Stadium.

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