Over the past few years, the FANG stocks have looked indestructible, outpacing even the broader market's already robust returns, with each racing toward the $1 trillion mark. The biggest FANG stock of all is Alphabet (GOOG 0.97%) (GOOGL 0.95%), with a market capitalization of $770 billion. With its dominant Google search business and growing YouTube service, Alphabet absolutely dominates the digital advertising industry, with 42.4% of the U.S. market, and generating over $21 billion in net income per year.
Of course, Amazon (AMZN -0.68%) CEO Jeff Bezos once quipped, "Your margin is my opportunity," and his e-commerce behemoth is now aiming at some of Alphabet's loot. Here are three ways Amazon is setting its sights on the search giant.
Alphabet's oldest core business is search, where ads appear at the top of its Google's query engine. It dominates this industry, with about 63% desktop query market share, along with a whopping 93% mobile market share.
Currently, Amazon's core e-commerce site doesn't factor much in the digital ad market; however, recent quotes from leading advertising agencies indicate that could be changing. WPP Group (NASDAQ: WPPGY), Publicis Groupe (PUBGY -0.11%), and Omnicom (OMC 0.08%) -- the three largest advertising conglomerates -- all plan to greatly increase their spending on Amazon this year, with increases estimated at 40% to 50%. WPP's GroupM CEO Kelly Clark said, "We are absolutely leaning into Amazon as an ad partner and think there are big advantages to our clients." Amazon's e-commerce platform has become so big -- at about 44% of overall e-commerce traffic and about 4% of all retail sales -- that brands may find search and display ads on Amazon's web page to be higher-conversion leads than even Google's queries.
Research firm eMarketer estimates Amazon will grow U.S. ad revenue from $1.65 billion in 2017 to $2.35 billion in 2018 and $3.19 billion in 2019. While that's still far less than the roughly $40 billion in ad revenue Google makes in the U.S., it's still significant progress.
In addition to search and display, voice also presents an opportunity for Amazon, as well as a threat to Alphabet. With the advent of smart-home speakers, it's entirely possible that voice-enabled search begins to make a dent in text-based search in the years ahead. If that happens, Amazon's leading Alexa-enabled smart-home speakers and devices will likely be the biggest winners. Amazon currently has a 68% share of the smart-home market, compared with Google Home's 25% share, according to eMarketer. It's obviously the very early days, but since the combination of Prime and Alexa are so powerful to households, I expect Amazon's dominance to continue.
One of Alphabet's bigger growth drivers is its YouTube platform. While Alphabet doesn't break out how much it earns from YouTube specifically, the service streamed a jaw-dropping 5 billion videos per day in 2017, with over 3.25 billion hours streamed each month.
While Amazon won't exactly threaten those numbers anytime soon, it did receive a patent in October for a system that allows customers to automatically lower the price of an item on Amazon if they watch a video ad. The discounts will come at no cost to Amazon since it will get paid by the advertiser. Thus, it's entirely possible that many how-to videos and product features by online influencers could migrate away from YouTube and onto Amazon's platform in the years ahead.
The battle ahead
All of these threats don't necessarily mean that Google is in immediate trouble, and I am a proud shareholder of both companies. The digital advertising market is still growing at double-digits, and people will still be searching on Google and watching YouTube for many years to come. Still, with the "Death Star" of Amazon nipping at Alphabet's heels in its three core businesses, Alphabet shareholders shouldn't necessarily be complacent, and Amazon shareholders should be excited about the possibility of new revenue streams.