Alphabet's (GOOGL) Google and Facebook (FB) have developed a near stranglehold on the U.S. digital advertising market, with eMarketer estimating that the tech juggernauts will control a combined 60% of the sector in 2017.
But a third player is quickly emerging in their rear-view mirror: e-commerce giant Amazon (AMZN) , whose ad business could skyrocket 65% year-over-year to $3.5 billion in 2017, according to BMO Capital Markets analyst Daniel Salmon. BMO on Tuesday named Amazon its Top Pick among U.S. Large Cap Stocks and upped the stock's price target to $1,200 from $900. The firm also downgraded Alphabet to Market Perform from Outperform due to increased competition from Amazon's ad business.
Shares of Amazon were rising 0.8% to $898.60 on Tuesday afternoon.
CEO Jeff Bezos said in his 2015 letter to shareholders that the three "pillars" of Amazon's business are its Marketplace, Prime and Amazon Web Services units, with Amazon Studios and its Alexa voice assistant products emerging as potential fourth and fifth pillars. Salmon argues, however, that Amazon's next pillar could be its advertising business, eventually being worth as much as $150 billion in the future (according to FactSet, Facebook's advertising revenue in 2016 was roughly $27 billion, while eMarketer estimated that Google generates $52.9 billion in search ad revenue last year).
Amazon's display and search advertising platforms are in their early days, Salmon said, but together they will power Amazon's rise above Facebook and Google's ad businesses. Google is expected to claim about 78% of total U.S. search ad revenues this year, while Facebook is projected to capture at least 39% of the U.S. display ad market, according to eMarketer.
Amazon can grab search dollars from Google and Facebook in cost-per-click ads in markets such as retail, media/entertainment, consumer electronics and consumer packaged goods, Salmon noted. The wealth of consumer purchase data amassed over Amazon's 20-year-plus history is what sets it apart from rivals like Google and Facebook, he added.
"While Google knows what people are searching for and Facebook knows what people are interested in and who they are connected to, Amazon knows the specific products that customers are purchasing and how frequently they are purchasing these products," Salmon explained.
As of last September, about 55% of consumers in the U.S. began their product searches on Amazon, up from 44% in the year prior, according to market research firm BloomReach. Salmon said he expects this trend to continue, as product searches are "some of the most easily monetized searches."
But the Amazon advertising revolution won't take place overnight, as Google still serves as the touchpoint for billions of search queries and Facebook has an enormous amount of data detailing unique person-to-person relationships that Amazon doesn't have, Salmon added.
"We believe more than half of Google's paid search revenue and the majority of Facebook's advertising revenue are not at risk," Salmon said.
Editors' pick: Originally published April 4.