Advertising checks for ad spending on Amazon.Com Inc (AMZN  ) remain strong (Skai 4Q marketplace ad spending increased 48% Y/Y through Nov), BofA analyst Justin Post writes.

He expects Amazon's 2024 ad growth to be aided by new initiatives, including more ads in Prime Video and the ramp of new ad partnerships.

Ad revenue strength can potentially contribute to his margin upside thesis on the stock, as his analysis suggests advertising revenue will contribute 370 bps to FY23 North America (NA) margins.

BofA maintained a Buy rating on Amazon with a price target of $168.

In addition to retail efficiencies, the analyst sees potential for ad revenue upside to drive margin upside in 2024.

CEO Andy Jassy indicated that $7 billion of Amazon's $17 billion 2022 media content spend was for Prime Video content production & licensing. Amazon's recent announcement of a $3 NA monthly premium for ad-free Prime Video suggests that Amazon will ramp up video ads more aggressively in FY24.

Netflix (NFLX  ) commentary suggests that an ad sub can monetize better than an ad-free sub, and if he assumes Prime has 150 million Video users and 70% choose lower-cost subscriptions with ads, he estimates $3 billion in potential incremental ad revenue and $4.8 billion in total incremental ad+subscription revenue.

Amazon signed a 3P advertising deal with Pinterest for Sponsored Product ads in April and recently signed deals with Meta and Snap to boost Amazon's ad performance on their sites.

While financial details are limited, the analyst sees potential for modest expansion in Amazon's network ad revenues for the Sponsored product deals.

For the separate Meta and Snap deals, there is potential to improve the ROIs of Amazon's ads, boosting GMV.

Amazon made significant progress with NA margins in 2023; he estimates NA margins at 3.5% vs. -0.9% in 2022.

Still, backing out estimated advertising margin contribution, the analyst forecast NA retail margins at -0.2% in 2023 vs. an average of 3.0% in 2018-2019.

Therefore, the analyst noted that Amazon's NA retail margins still have significant room to grow with the potential to reach 7% based on Amazon's commentary and his advertising estimates, well above Street estimates at 5.7% in 2025.

The 130 bps improvement in Street models for 2024 NA margins (to 4.8%) is conservative given the 450 bps expected improvement in 2023 and his estimates for close to a 50 bps contribution from Prime Video, the analyst said.

He projected FY23 revenue and EPS of $570.67 billion and $4.72.

Price Action: AMZN shares traded lower by 0.34% at $149.42 on the last check Wednesday.