Amazon (AMZN +0.53%) investors may want to forget 2022 in a hurry. The technology giant has struggled on the stock market in the past year, due to a substantial slowdown in the company's growth and the sell-off in equities that sent the market into bear territory. But there is one business segment that has been soaring impressively and looks set to fly higher in 2023 and beyond -- advertising.
NASDAQ: AMZN
Key Data Points
The e-commerce and cloud computing giant has made solid strides in the advertising business, generating $26.2 billion in revenue from this segment in the first nine months of 2022. This indicates Amazon's advertising business is on track to exceed its 2021 revenue of $31 billion, considering the quarterly revenue run rate in 2022.
Advertising is currently a small part of Amazon's overall business. The segment accounted for 7.5% of its top line in the third quarter of 2022. But it could move the needle in a bigger way for the company in the future.
Not surprisingly, savvy investors have taken advantage of Amazon's dip in the past year. Warren Buffett's Berkshire Hathaway bought more Amazon stock in 2022. There are multiple reasons why Buffett seems to love Amazon, and the advertising business could give Berkshire another reason to add more shares of this beaten-down tech giant to its portfolio.
Let's see why that may be the case.
Amazon's remarkable advertising growth is here to stay
Amazon reportedly generated $10 billion in revenue from the advertising business in 2018. So, the company's revenue from this segment more than tripled in just three years. What's more, advertising revenue jumped 22% in the first nine months of 2022 as compared to the prior-year period. It is impressive to see that Amazon has managed to grow its advertising revenue substantially at a time when its competitors are struggling.
Furthermore, Amazon's ad business is outpacing the growth of the market. It is estimated that digital ad spending increased by 8.6% in 2022 to $567 billion. That's down from the initial estimate of 15.6% growth for the year on account of macroeconomic headwinds that led advertisers to curtail their spending in 2022. Amazon, however, hasn't been affected by such a downturn, as its impressive growth indicates.
Amazon is scratching the surface of a massive opportunity. The digital advertising market could be worth almost $700 billion by 2024. The company has been gaining market share in digital advertising, which is evident from its faster revenue growth. The secular growth in digital advertising and Amazon's improving market share should set the company up for robust growth in this segment.
For example, Amazon's $31 billion ad revenue in 2021 gave it a share of just under 6% of the digital advertising market, which was worth an estimated $521 billion in 2021. If Amazon manages to corner 10% of this market by 2024, its annual advertising revenue could jump to $70 billion by 2024, which would be more than double the 2021 level.
More importantly, Amazon seems capable of taking more share away from competitors thanks to its massive reach, a solid return on investment for advertisers, and the company's multiple services such as music, video streaming, and e-commerce that give it access to a massive data pool of consumer behavior, thereby allowing the company to serve ads with higher accuracy.
Not surprisingly, Nick Jones of JMP Securities claimed that the ad business could get bigger than Amazon's cloud computing business in the future, driven by the company's foray into live sports. This move could help it attract more advertisers.
In all, the advertising business should turn out to be another key catalyst for Amazon in the long run and complement the growth of the cloud computing and e-commerce segments.
Should you buy the stock?
Amazon stock is down 47% in the past year, and it is trading quite close to its 52-week lows. This sharp decline has brought the company's price-to-sales multiple down to 1.8. That represents a discount from Amazon's five-year average price-to-sales ratio of 3.8, and is also lower than the S&P 500's sales multiple of 2.3.
Amazon has unlocked another major growth driver in the form of the advertising business, and it continues to clock healthy growth in the cloud computing business as well. With global e-commerce sales expected to pick up in 2023, Amazon stock could regain its mojo. It may be a good idea for savvy investors to buy this beaten-down Warren Buffett stock while it is trading near its 52-week lows, as it is capable of soaring in the long run.
