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Here's Amazon's Next $10 Billion Business

By Danny Vena - Oct 27, 2018 at 8:03PM

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This category is among the company's fastest growing segments.

It seems like every time investors turn around, online sales leader Amazon.com (AMZN -3.21%) has found another industry to disrupt. The company is already the undisputed king of e-commerce, and it dominates the cloud computing industry it pioneered. The smart speaker didn't exist until Amazon introduced the Alexa-powered Echo, another category the company currently tops.

One of the more recent areas of interest for Amazon is advertising. The company has long promoted products on its site, but the segment has increasingly come into focus over the past several quarters. When Amazon reported its third-quarter financial results, there was an important nugget, tucked away in its supplementary financial disclosures: This nascent business is now on track to generate more than $10 billion in revenue over the next year.  

Woman's hand hovers over keyboard while other holds credit card.

Image source: Getty Images.

Another massive opportunity?

Amazon wouldn't be interested if the opportunity wasn't lucrative enough. Worldwide digital advertising topped $209 billion in 2017, surpassing television for the first time. It's also worth noting that by some accounts, the majority of the growth last year came courtesy of Facebook (FB -8.63%) and Google, a division of Alphabet (GOOGL -6.10%) (GOOG -5.91%), so the digital ad leaders have the most to lose. 

As traditional media increasingly adopts online delivery, growth in digital ad spending is expected to continue, increasing 16% to reach $250 billion in 2018. 

Growing like a weed

Amazon previously revealed that the business segment that it refers to as "Other" in its financial reports "primarily includes sales of advertising services." A look at how growth has progressed over the past several quarters is enlightening:

Period

Q3 17

Q4 17

Q1 18

Q2 18

Q3 18

Net sales

$1.1 billion

$1.7 billion

$2.0 billion

$2.2 billion

$2.5 billion

Y-O-Y growth

58%

60%

132%

129%

123%

Data source: Amazon's Third-Quarter Financial Release. YOY = Year-over-year.

As you can see from the above chart, Amazon's advertising sales achieved triple-digit year-over-year growth in each of the past three successive quarters, putting it on track to top $10 billion in annual revenue.

Consumer behavior is feeding the trend

Changes in how consumers search for products are helping to fuel Amazon's ad sales. A full 49% of shoppers looking for specific products will start their search on Amazon, as opposed to a general search on Google, according to brand intelligence research company Survata. Other studies place the number even higher, with Amazon as the starting point for 54% of product searches. 

While we may not know the exact percentage, the trend is clear: A significant number of online shoppers visit Amazon first to find a product. That gives the company the decided advantage of a captive audience when it comes to digital advertising.

This opportunity has Amazon's attention

During the second-quarter conference call, CFO Brian Olsavsky gave investors additional color regarding the demand for advertising on the e-commerce platform:

We're seeing strong adoption across a number of fronts. Amazon vendors, sellers, and authors, as well as third-party advertisers, want to reach Amazon customers. So we have hundreds of thousands of emerging and established advertisers. And they're using our services to achieve their marketing goals, whether that's to drive new brand awareness, discovery, or ultimately purchase decisions on our site.

Amazon has been very careful not to alienate its online shoppers with too much advertising, but there's still room for growth. Monica Peart, eMarketer's senior forecasting director, says: "So far, it's been conservative in its ad load. It remains an open question as to when Amazon will take advantage of its significant reach and dominance in rich shopper data to ramp up the placement of ads in other areas." 

Earlier this month, reports emerged that Amazon was planning to debut a new ad-supported streaming video service through its IMDb subsidiary and use its vast stores of data to help sell targeted advertising, creating another potential outlet for the company's growing ad business.

A woman watching multiple projections of digital advertising in front of her.

Image source: Getty Images.

Another industry to dominate?

CEO Jeff Bezos has famously said, "Your margin is my opportunity." Amazon's e-commerce site is a closed ecosystem that will allow the company to more effectively target ads to shoppers, while also employing the reams of data it has on their purchase history. This gives the company a significant advantage that competitors Facebook and Google don't have: The customers seeing Amazon's ads are already shopping on its site.

Investors should pay close attention to how the company addresses this large and growing opportunity. It could quickly become Amazon's next cash cow.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,082.03 (-3.21%) $-69.11
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,093.71 (-6.10%) $-136.05
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
FB
$179.28 (-8.63%) $-16.95
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
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