Pinterest (PINS +0.27%) dropped more bad news for the advertising industry on Monday. The search social media company announced worse-than-expected fourth-quarter revenue and guided for first-quarter revenue to increase at a rate in the low single digits. This adds to similarly underwhelming fourth-quarter results from digital advertising peers Meta Platforms, Alphabet, and Snap.
But there's been at least one bright spot in the advertising industry this earnings season so far: Amazon's (AMZN +0.45%) advertising business posted strong, double-digit year-over-year growth. This suggests some marketers may still be spending a pretty penny on ads but are doing so in areas where there's more evidence of measured results. The double-digit growth in Amazon's advertising business amid macroeconomic uncertainty is a testament to its value proposition to marketers. After all, companies likely want to do everything they can in uncertain macroeconomic environments to ensure their ad spend is measured and effective.
NASDAQ: AMZN
Key Data Points
Tight budgets are leading marketers to Amazon
Amazon's overall sales during Q4 were solid, rising 9% year over year to $149.2 billion. But not all segments saw nice growth. Indeed, the company's online stores segment, which accounts for more than 40% of overall revenue, saw sales decline 2% year over year. But sales did rise 2% after adjusting for currency headwinds.
Amazon's advertising business was among its top-performing segments, posting growth of 19% -- or 23% on a constant-currency basis.
"Sellers, vendors, and brands continue to look to Amazon's advertising capabilities to reach customers in the always competitive holiday season," said Amazon Chief Financial Officer Brian Olsavsky in the company's fourth-quarter earnings call, "even as the macro environment required them to scrutinize their own marketing budgets."
Growth during a time that marketers are scrutinizing their ad spend more closely suggests that ad agencies and brands are finding more value from Amazon (where shopper data can be more easily tied to their respective ad spend) than from social media peers like Meta and Snap. This isn't particularly surprising since the two companies have been forced to rebuild their measurement and ad-tracking technologies to be less reliant on Apple's mobile operating system after the iPhone maker rolled out new privacy features for its users.
A "small" but important segment
While Amazon's advertising business, at just 8% of fourth-quarter revenue, is still "small" relative to the e-commerce and cloud-computing company's overall business ("small" is in quotes here because it's still large in absolute terms, contributing $11.6 billion in fourth-quarter revenue), it's growing in importance for Amazon. Not only is the segment posting greater growth than its consolidated revenue, but it's taking significant market share from slower-growing digital advertising peers, including Meta Alphabet, and Snap. Further, Amazon has stated that its advertising business has a higher profit margin than its overall business does. This means the segment has an outsized impact on profitability as it grows.
Alongside Amazon's fast-growing cloud-computing business, the company's advertising business is helping it successfully diversify its business beyond retail, where it runs on razor-thin margins. While retail will remain important to Amazon, investors should increasingly give substantial weight to the company's non-retail segments like cloud computing and advertising when analyzing the growth stock.
