Amazon's (AMZN -1.65%) $36 billion advertising business could still get a lot bigger. While the overall advertising industry struggles, marketers are looking to the efficient spending opportunities retail media networks provide. Analysts expect ad spend through online retailers to grow 25.8% to 28.4% next year, and the market could reach $100 billion in the U.S. alone by 2026. And Amazon is the dominant force in the market.
As ad spend shifts to retailers, Amazon's ad business could double its revenue again in just a few short years.
It's hard to keep up with Amazon
Despite its size, Amazon is still one of the fastest-growing digital advertising companies. Amazon's ad sales increased 25% year over year last quarter. The only two companies selling more advertising -- Alphabet and Meta Platforms -- grew ad revenue by 2.5% and -3.7%, respectively, during the same period.
Walmart, which operates an ad business about 1/15th the size of Amazon's, managed 40% growth in its ad business last quarter after making some key changes. However, it's unclear whether it can continue to take share from Amazon after it laps those changes next year. Only a few very small retailers are growing faster than Amazon.
That's because retail advertising can actually present a challenge for advertisers. Each retailer has its own data, and managing ad spend across multiple retailers requires additional adtech for measurement and ad placement tools. As the largest online retailer -- offering everything from home goods to tech gadgets -- Amazon has a huge advantage over retailers focused on specific market segments.
Amazon also gets a boost from its robust third-party merchant network. Many of those merchants sell primarily through Amazon or build their brands directly on Amazon. That makes spending on Amazon ads a natural fit.
Finally, Amazon offers the benefit of tightly knit video advertising with its retail ad spend through its Prime Video and Twitch properties. The addition of Thursday Night Football to Prime Video earlier this year added some extremely valuable ad inventory.
As a result, Amazon commands 76.9% of retail ad spend in the United States, according to Insider Intelligence.
How big can Amazon's ad business get?
The outlook for retail media network ad spend is extremely rosy, and Amazon's position in the market isn't going anywhere. Analysts at Forrester Research expect the U.S. market to grow to $85 billion by 2026, and analysts at McKinsey are even more optimistic, with a $100 billion outlook for that year.
Even if Amazon's market share shrinks to 70% by 2026, it's looking at $60 billion to $70 billion in annual revenue. And if the United States still represents around three-quarters of Amazon's total ad revenue at that point, the total business could be $80 billion to $90 billion. That's about double the size of Amazon's current ad business and approaching the level of Meta's current ad business.
Things might not play out exactly like that, but based on the expected growth in retail media ad spending, there's certainly a lot of room left for growth in Amazon's ad business. And Amazon's appealing profit margin profile can give it a lot of cash to fuel its growth and appease investors.
