Please ensure Javascript is enabled for purposes of website accessibility

Amazon's Advertising Business Is Firing on All Cylinders

By Daniel Sparks – Nov 3, 2021 at 9:05AM

Key Points

  • Spotify and Amazon have been standouts when it comes to digital advertising recently.
  • Amazon is now raking in billions of dollars of ad sales every quarter.
  • Management expects more strong advertising growth in Q4 despite a tough year-ago comparison.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Some digital advertising businesses are navigating this dynamic environment better than others.

When Snap (SNAP 1.56%) reported earnings last month, the company's weaker-than-expected top-line momentum spooked investors, leading to a sell-off of almost all digital advertising stocks. The company cited recent changes to iOS ad tracking and measurement, as well as inventory shortages, as reasons marketers weren't spending as much as expected. Snap said this trend would be particularly pronounced in Q4, reflected in revenue guidance that was well below analysts' expectations.

While some digital advertising companies similarly reported weaker-than-expected third-quarter revenue, there have been exceptions. Consider Spotify (SPOT -1.74%). The company's third-quarter top line came in ahead of analyst estimates, helped in part by surging advertising revenue; its advertising revenue jumped 75% year over year. 

But there's another advertising juggernaut faring extremely well that many have been overlooked recently: Amazon's (AMZN -1.50%) ad business, which brings in billions of revenue for the company every quarter.

A person looking at charts on a laptop.

Image source: Getty Images.

Third-quarter performance

Amazon's advertising business saw significant momentum in Q3. The company's "other" segment, which management said in the company's earnings call is made up primarily of advertising sales, rose 49% year over year when excluding foreign exchange impact. And that's up against a tough comp of 49% growth in the year-ago period.

Highlighting the advertising juggernaut Amazon has become, other revenue was about $8.1 billion during the period. That means that the company has a $32.4 billion ad business on an annualized run-rate basis.

What management said

While Amazon's third-quarter other revenue numbers bode well for the e-commerce and cloud-computing company's fast-growing advertising business, the company's third-quarter earnings call offered even more reasons to be bullish on the important business unit. In particular, management offered a promising view for the holiday quarter, contradicting the concerns Snap pointed to.

When asked about whether the tough supply chain environment was weighing on fourth-quarter guidance, Amazon CFO Brian Olsavsky responded, "No. We're actually ... seeing strong growth." And this is despite the fact that Amazon had an unusually scheduled fourth-quarter Prime Day in 2020 to help bolster traffic (and marketer interest) on its website during the period. Prime Day usually occurs during the summer.

To be fair, Snap is still growing faster than Amazon. Indeed, it's not like Snap's ad business is doing poorly. It's just not doing as well as analysts and investors were hoping it would do. Third-quarter revenue increased 57% year over year and the midpoint of Snap's fourth-quarter guidance implies not-so-bad growth of 30%.

Still, the takeaway is that not all advertisers are created equal in this dynamic advertising market. As earnings season continues to unfold, it will be interesting to see who else could stand out during this challenging time.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Amazon and Spotify Technology. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.