Amazon (NASDAQ: AMZN) and Netflix (NASDAQ: NFLX) dominate their respective markets of online retail and video streaming. But their dominance and size also mean revenue growth is slowing, which has pressured their stock prices over the last year.
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Still, these companies have plenty of options to deliver profitable growth that will eventually benefit investors over the long term. Let’s look at key growth opportunities that could drive new highs for these two top stocks.
1. Amazon
Amazon is more than a place to buy books and electronics. Revenue from Amazon’s retail business, including online and physical stores, made up 47% of its total revenue in 2022, but investors should pay attention to the huge opportunity in the company’s other businesses, such as advertising services.
With over 2 billion shoppers visiting Amazon.com every month, third-party brands want to advertise their products on the company’s online store, and they are willing to spend big for it. In the second quarter, Amazon made over $10 billion from advertising services. While that’s only 8% of its total revenue, it’s also one of Amazon’s fastest-growing businesses, and it could explode into a massive business within the next decade.
Amazon’s advertising services growth clocked in at 22% year over year in the second quarter, but retail media advertising is projected to grow into a larger market than TV advertising, and Amazon is the runaway leader due to its massive customer base.
Another opportunity investors should watch is third-party seller services, which complement the company’s advertising opportunity. Revenue in seller services grew 18% year over year last quarter, which includes commissions and fees when a merchant sells a product on Amazon. With third-party seller services already bringing in over $32 billion per quarter, it could become a larger source of revenue than Amazon’s retail business.
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What this means is that Amazon is monetizing its customer base in multiple ways. It makes money from the merchant buying an ad and then makes money off the same product again when the customer buys the advertised product. Third-party sellers add to this opportunity. Allowing other merchants to list products for sale expands the selection of goods at competitive prices, which attracts visitors to the website, and in turn, attracts more ad spending.
Amazon is a dynamic business that can grow for decades. Retail advertising is expected to more than double by 2027, while global e-commerce spending is expected to grow to over $6 trillion this year and keep growing, according to eMarketer.
Amazon’s large customer base is giving the company many ways to drive returns for shareholders, and we’re not even talking about the company’s huge opportunity in cloud services and artificial intelligence.
2. Netflix
Netflix has grown into a juggernaut in video streaming, with 247 million subscribers at the end of the third quarter. After consecutive quarters of subscriber declines gave investors a scare last year, Netflix has made an impressive comeback, but investors shouldn’t underestimate the stock’s long-term upside.
The company’s paid sharing initiative, to force free riders to pay up for a membership, is working as intended. In the third quarter, paid membership growth accelerated for the second consecutive quarter, increasing by 10.8% year over year, compared to an 8% increase in the second quarter, and 4.9% in the first quarter. This is part of management’s long-term goal to accelerate revenue growth.
Still, the paid sharing effort will only generate a one-time acceleration in subscriber growth. Once a member signs up, Netflix must find new users to keep growing. There must be a plan B to grow the value of the business for shareholders.
What doesn’t get enough attention is Netflix’s opportunity to convert more revenue into a profit. Growing the top line is important, but what counts in the long run is growth in earnings per share and free cash flow.
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Netflix is already producing a high operating profit margin of 17.5% on a trailing-12-month basis. But Netflix’s margins could expand well beyond 20%.
In September, CFO Spencer Neumann explained that Netflix’s margin opportunity could be on par with other networks, which one analyst pointed out would suggest a high operating margin between 40% to 50%. Netflix earned $1.9 billion of operating income on $8.5 billion of revenue last quarter, bringing its operating margin to 22%. A higher margin would significantly boost its profit, and therefore, the share price.
Neumann declined to offer a specific margin target, but he did state on the company’s third-quarter earnings call that Netflix doesn’t have any near-term ceiling to its long-term margin potential.
There will be periods when Netflix prioritizes membership growth over profitability. This will require higher investments in content, so margins won’t increase every year. However, investors should expect Netflix to gradually increase margins, and that could benefit the stock.
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Wall Street’s current estimate is that earnings per share will grow at an annualized rate of 23% per year over the next five years. That would be enough to potentially double the stock price by 2028.
