In separate July 1 notes, Needham analysts provided the latest insights from recent channel check conversations related to Amazon (NASDAQ:AMZN), and Meta Platforms (NASDAQ:META).
For Amazon, a senior eCommerce consultant mentioned that Amazon's core retail business, excluding AWS and advertising revenue, has been profitable since the third quarter of 2020. However, the margins are significantly lower than traditional retailers like Walmart, which typically have net margins of about 3.5%.
The consultant also noted that Amazon is profitable in the U.K., Germany, and Japan but incurs losses in markets like Italy, Spain, Mexico, and Brazil, where lower per capita spending contributes to ongoing losses despite substantial capital investments.
Another consultant discussed the cost per thousand impressions (CPMs) for Amazon Prime Video ads, which range from $30 to $50, depending on targeting and links to online purchases through Amazon's retail media network. Premium content such as sports commands the highest CPMs, while less desirable time slots or content have the lowest.
“Advertising revenue associated with Amazon Prime Video's streaming service will grow over 113% y/y in 2024, they believe, because it introduced massive new connected TV (CTV) advertising units into the marketplace by making all of its 200mm global subs ad-driven, starting in January 2024,” Needham noted.
Moreover, a third consultant said it is likely that the U.S. government will transfer some of its workloads from Microsoft's (NASDAQ:MSFT) Azure Cloud to more secure alternatives like AWS's GovCloud. They also expressed skepticism about Google (NASDAQ:GOOGL) Cloud's viability for government work due to push-back from Google (GOOGL) employees.
For META, Needham analysts noted that generative AI technology is already impacting around 20% of the company’s content generation and monetization efforts.
Since late 2023, Meta has introduced GenAI functionalities like auto-generated ad copy and videos for small businesses, boosting click-through rates and auction density for Reels ads.
Instagram Reels accounted for 20% of one client’s Meta ad spending in Q1 2024, up from 15-20% in Q4 2023 and 10% in Q1 2023, with 60% of this growth being incremental, analysts highlighted. This has significantly contributed to the overall growth in Meta ad spending.
Moreover, Meta's weighted average CPM rose to $20 in Q4 2023 for the U.S., U.K., and Canada, up 25% year-over-year. In Q1 2024, the average CPM was $18, nearly 30% higher year-over-year. Despite higher CPMs, the ROAS for advertisers using Meta products remains stable, with a median target of 3x.
“This stability is due to improvements in targeting, consumer data, ad formats, and higher consumer spending,” Needham analysts wrote.
Needham also pointed out that Meta's internal hurdle rate for operating expenses is a 2-3x return on investment (ROI) over three years, while for capital expenditure, it is a 2-3x ROI over five years.