Amazon Digital Advertising Market Share Is Soaring

Amazon Digital Advertising Market Share: Amazon’s latest financial disclosures suggest that advertising is now the fastest growing business sector for the company by quite some way.

Analysts expect the company to be posting over $80 billion of ad revenue by 2026, and the firm recorded a 51% increase in the space year-over-year in its last quarterly figures – this on top of an already fairly high revenue base of $18 million.

Advertising is a high margin revenue generator even at the worst of times. But compared to Amazon’s traditional business activities – retail, Amazon Web Services (AWS), and cloud – the growth potential of a successful advertising model would be enormous. 

Amazon doesn’t have the kind of universal data dominance that Google has, or the ability to reach into customer’s private lives like Facebook (FB). But Amazon does have a business moat that is famously one of the most robust in all of market history, and probably impenetrable at this point in time.

This will make the other big players in the advertisement game somewhat nervous. Can Amazon leverage this dominance and take on the likes of Google (GOOG), Facebook (FB) and Apple (AAPL)? Where is Amazon’s growth coming from, and what can it offer that other ad companies cannot?

Amazon’s Basic Ad Model Is Big Business

Amazon’s ads come in three main varieties:

1. Headline Search Ads
2. Sponsored Ads
3. Display Ads

And despite Amazon’s success in breaking into the advertising market, its standard approach to advertising sales is still fairly conventional. It offers advertisement based on a Pay-per-Click (PPC) model, and it prioritizes those ads using an auction method. This is not too dissimilar from what we know of Google’s and Facebook’s own models.

However, Amazon is uniquely positioned to sell its services to vendors due to its knowledge and expertise of customer’s buying behaviors. The Seattle-based behemoth is competing here with Google’s own experience in this field and showing that they can hold their own. 

So what is Amazon offering to sellers and brands in this regard? Well, specifically on Amazon’s flagship e-Commerce marketplace platform, the company is developing two free tools to generate ad leads for sellers. These are the Stores and Posts products:   

Amazon Stores Is A Branding Promotion Tool

Although this feature isn’t new – Amazon Stores has been around since mid-2017 – Amazon has recently been enhancing the Stores functionality with additional features, such as clickable collection images, Stores scheduling, and branding options for better customer engagement.

Stores is essentially a branding platform for vendors to curate and promote their particular brands, and as such is a great way for Amazon to sell the benefits of its ad solutions.

Amazon Posts Is A Discovery Tool

Amazon Posts is a product discovery tool that enables potential customers to access a seller’s branded goods through curated ad feeds.

Posts is still in beta, but Amazon hopes to widen its sales funnel with the product over time. Posts will focus on product and lifestyle content, and will utilize Amazon’s real-time analytics to give vendors up-to-date data on the success of their ad campaigns.

AMZN Growth Rate Is Shocking For Its Size 

Amazon’s financial figures are bewildering. The company has the fourth largest market cap of any firm in the world, at $1.655 trillion, and yet on paper its sales and revenue growth rates look like those of a small-cap growth company in the early stages of its life-cycle.

For instance, in its latest quarterly report, Amazon saw Q4 revenues grow by $38 billion at 44%, while its sales popped to $71 billion, and its net income climbed by 121% to just over $7 billion.

And if that wasn’t enough, the company beat EPS estimates by close to an eye-watering $7 per share, and a revenue beat of not much short of $6 billion.

Furthermore, over the past five years, Amazon has delivered stockholder equity increases of 770%. The company’s cash flows are healthy and admirable, and even though its liabilities increased 40%, its assets increased 42%.

And yet…..

Many analysts suspect that Amazon’s share price is still undervalued. On a comparative analysis with other FAANG companies, and using a Forward P/E ratio as an estimate, Amazon’s price could lie anywhere from its current price up to around the $8,000 mark.

Factor into this that Amazon’s price trend isn’t just increasing but speeding up, and the bullish thesis becomes irresistible.

AMZN Capitalizing On e-Commerce In A Large Way

The Covid-19 pandemic has seen a windfall for online shopping. It has also helped speed up a wider trend of sales moving from physical shops and into virtual spaces, and calcified those customer habits still further. Amazon is perfectly situated to benefit from these e-Commerce tailwinds, and leverage its advertisement interests along the way.

Although these trends would see benefits for both Facebook and Google alike, the path forward for these two titans isn’t as clear as it might be.

Facebook is facing difficulties from Apples’s decision to shore up user data permissions across the Apple product ecosystem, and Google is expecting competition from Apple when and if the latter rolls out its search engine for iOS and macOS devices.  

And Finally: The Rise Of The Triopoly?

Amazon’s success in the advertising space will auto-catalyze its own general business-wide revenue growths. With its online stores currently generating around 15% year-on-year improvement, and its ad growth somewhere near 45%, it’s easy to envision efforts in advertising affecting on its sales bottom-line too.

After all, Amazon’s ad business is about driving customers to its own platforms, something that Google and Facebook can’t say about their own models.

Which leads us to ask: is the advertising space now becoming a triopoly and not just a duopoly? Given that Amazon owned 8% of the digital advertising market in 2019, and is growing so fast the likelihood is it will soon start eating some of Google’s lunch and Facebook’s too.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.