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Amazon Advertising: Is the Rocket Slowing Down?

Amazon’s advertising business is a promising venture, as it grows fast and has high operating margins. Still, the company failed to meet Wall Street’s expectations for Q1. Is the hype over?

Advertising is Amazon’s  (AMZN) - Get Amazon.com, Inc. Report new rising star: The segment generated over $31 billion in 2021 and is growing at a fast pace — revenue was up by 25% in the 2022 first quarter, compared to the same period in 2021.

So is it safe to say Amazon is becoming an advertising heavyweight like Google   (GOOGL) - Get Alphabet Inc. Class A Report and Meta  (FB) - Get Meta Platforms Inc. Class A Report?

Amazon Ads' relevance is poised to grow in the next few years. However, investors shouldn't get carried away by the market’s over-optimistic projections. A certain Chinese rookie might be about to shake up the industry and steal Google’s advertising crown before the Seattle behemoth does.

Figure 1: Amazon Advertising: Is the Rocket Slowing Down?

Figure 1: Amazon Advertising: Is the Rocket Slowing Down?

(Read more from Amazon Maven: Amazon Post-Earnings: What Wall Street Is Saying)

Already a Market Leader

Let’s start with the big picture: Google, Meta, and Amazon’s share of global advertising spending was 39% in 2020. In 2021, that figure jumped to 47% and is expected to reach 50% in 2022.

Zooming in and taking into account only digital advertising spending, the triopoly crushes the competition: Their share of the market expanded from 67% to 74% in 2021, while the rest of the digital ad market grew at a shy 3% rate over the same period.

Amazon Ads enjoyed a massive 56% growth rate from 2020 to 2021: The company managed to expand from about $20 billion to $31 billion in sales. That’s a skyrocketing pace, considering the market expected the company to reach $38 billion only in 2023.

A Potential Threat

In the first quarter of 2022, Amazon showed progress. Revenues increased 25% year-over-year. — a solid expansion, but still $250 million lower than Wall Street’s expectations. From a competition standpoint, Alphabet has bled a lot more: YouTube sales grew 14% during the period, instead of the expected 25%.

Although I personally believe Amazon’s portion of the digital advertising industry will keep increasing, YouTube’s miss could be interpreted as a warning. There are two main headwinds I believe will affect Amazon Ads growth, for now: (1) raising inflation due to COVID and (2) TikTok’s expansion.

The first reason might be the most obvious. Rising consumer prices will cause demand for new products to decrease and, by extension, sellers won’t have much cash to invest in advertising.

The second headwind is the fight for people’s attention. Analysts credit YouTube’s “poor” performance to TikTok, which is expected to reach $24 billion — the same figures generated by Google’s video platform — by 2024. Since Amazon Ads' revenues also come from live sports transmissions, Twitch, FreeVee, and Fire TV, the company is also threatened by the video platform.

A Key Advantage

Even if Amazon Ads does not expand as quickly as previously expected, it is still a fast-growing and high-margin business. In Evercore ISI’s Mark Mahaney’s words, Amazon could “tap into a new leg” of revenue growth by building out international and brand advertising.

“Key fact in plain sight: Amazon’s Ad revenue is bigger than YouTube ($31 billion vs. $29 billion in 2021) and is growing faster (56% vs. 46%). And unlike GOOGL and FB, AMZN faces no privacy-driven ad attribution headwinds, as AMZN is a closed-loop ecosystem,” said the analyst.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)