Amazon (AMZN 0.91%) says it just had the biggest Prime Day ever, with shoppers purchasing more than 300 million items. And while Amazon may have set new records for its retail business, it may have benefited much more with its advertising business both immediately and long term. Here's the big takeaway from Prime Day trends.
Where are the deals?
Many consumers were disappointed with the discounts available on Amazon for Prime Day. Despite Amazon's claim that customers "saved" a record $1.7 billion on Prime Day, most merchants decided not to offer the steep price discounts they've offered in the past.
But that didn't slow down sales. Amazon highlighted that small businesses sold $3 billion worth of items on its marketplace.
With millions of Prime members flocking to Amazon's marketplace on Prime Day, those businesses saw a great return on investment on Amazon ads.
Instead of offering steep discounts, brands spent heavily on Amazon ads, according to a report from Bloomberg. What wasn't featured in Amazon's press release is how effective those ads were for third-party merchants and how much revenue they generated for Amazon.
Investors should consider an ad sale as worth a lot more to Amazon than a retail sale. Gross margin is higher, fulfillment is easier, and it's extremely scalable. Advertising revenue grew 25% in the first quarter on top of 76% in the year-ago period. That's actually the slowest growth Amazon's ever recorded for the segment, which it previously lumped in with its other revenue. That number ought to reaccelerate in the second half of the year as it laps tougher comparables and gets a boost from Prime Day.
The long-term benefits of Prime Day
Every click, search term, and item added to someone's cart is valuable data for Amazon. The purchases and the variety of those purchases can help Amazon develop a unique profile of who each of its shoppers is.
Prime Day gave Amazon a lot of data, regardless of whether customers actually bought anything. Even if someone just searches for an item or category of items, and clicks on a few results, maybe adds an item to his or her cart, but abandons it, it tells Amazon a lot about that customer. Those data can be used for it to target advertisements and generate better conversion rates in the future.
First-party data is especially valuable in a post-iOS 14 world. The Apple (AAPL 0.30%) operating system update instituted privacy changes that prevent companies from tracking users across apps on their devices. That's made it more difficult to track ad conversions and target ads on some platforms. Social media companies, in particular, have been hard hit. But Amazon can benefit as it keeps users on its website or app and can track sales directly.
So, while Amazon reported record retail sales for Prime Day, even the sales it didn't make could benefit its ad business long term. And if advertisers on Prime Day saw good returns, they may shift more of their budgets to the platform and away from other digital advertising companies as targeting and measurement elsewhere proves difficult.
Investors might not see the impact of Prime Day on the advertising business until at least the third quarter earnings report, but the more big sales events Amazon holds, the more likely it is to see the ad business benefit.