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Amazon’s Advertising Business: The Next Google?

Digital advertising can become a meaningful driver of earnings upside and uplift in Amazon stock price. Today, the Amazon Maven discusses the opportunity.

The global digital advertising market reached $325 billion in 2019. For reference, this figure represented four times the expected size of the US auto industry. Uncertainty due to the pandemic caused growth to decelerate in 2020. But digital advertising has recovered and is on track to surpass $526 billion in 2023.

Although Amazon  (AMZN) - Get Amazon.com, Inc. Report does not disclose how much it makes in advertising revenues, Wall Street seems impressed by the giant ad business that Bezos and team have on their hands. Amazon’s ad business is estimated to be twice as large as Snap’s, Twitter’s, Pinterest’s and Roku’s combined – and climbing.

Figure 1: Amazon Advertising logo.

Figure 1: Amazon Advertising logo.

(Read more from the Amazon Maven: 3 Expert Opinions On Amazon Stock: Is It A Buy?)

How ads fit into the puzzle

Simply being on Amazon’s e-commerce platform does not guarantee a sale. This is why third-party sellers need visibility. Amazon knows it well, and the company charges vendors to promote their products on the marketplace.

To be clear, the ad opportunity for Amazon goes beyond its e-commerce business. The company also has a chance to infiltrate Twitch, Fire TV and live events like NFL Thursday Night Football streaming on Prime Video.

Massive growth opportunity

Amazon’s ad revenues are estimated to have reached $7.9 billion dollars last quarter, for YOY growth of 83%, vs. $3 billion only two years ago. The increase led Amazon’s global ad market share to surge from 3.8% in 2019 to 5.2% in 2020 – and the number could reach 7.1% in 2023, according to eMarketer.

Looking farther ahead, Amazon is expected to generate $26 billion dollars in advertising revenue this year, and the figure is projected to increase to over $85 billion by 2026. At those level, Amazon’s ad business would represent a very meaningful 9% of total company revenues.

Figure 2: Net ad revenue share worldwide, by company.

Figure 2: Net ad revenue share worldwide, by company.

Gaining relevance

Amazon’s advertising business does not need to compete directly with Google and Facebook for announcers’ money, just like Prime Video does not need to steal subscribers from Netflix. “Advertising is part of our flywheel,” said Brian Olsavsky, referring to Amazon’s goal of improving customer experience by pointing shoppers towards products that they might be interested in. 

Still, according to an eMarketer report, Amazon will gobble up around 220 basis points of Google’s share of total US digital ad revenues by 2023, consolidating the triopoly between them and Facebook. Since Amazon dominates e-commerce in the US, projections are that the company will control 76% of the $24 billion e-commerce ad market. For comparison, runner-up Walmart is expected to capture only 6% of it.

Parting words

As Amazon’s online retail business continues to grow, so should advertising revenues, in a virtuous cycle. The ad business has the added benefit of likely being a very high margin one, with much of the revenues trickling straight down to earnings.

Ads may not be a front-and-center topic of conversation for many Amazon stock investors today. But soon enough, it could be a crucial piece of the company’s ecosystem – and, maybe, a driver of share price upside.

Twitter speaks

Amazon’s advertising business is still fairly small, but the growth and margin expansion opportunities appear to be sizable. Is advertising a key piece of your AMZN investment thesis?

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(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)