Amazon.com, Inc. (NASDAQ:AMZN) has done a lot over the past 20-plus years. Founder and CEO Jeff Bezos has transformed the company from a garage shop operation into the world’s leading e-commerce player, the world’s biggest public cloud provider, a mega-popular streaming entertainment service, and much, much more. That is why AMZN stock has run up from $5 in 2001 to $1,000 today.
But after such a huge run higher (the bulk of which has happened over the past decade), investors are left asking: Now what? What will drive the next leg of growth?
Some are pointing to the grocery sector, where Amazon’s acquisition of Whole Foods Market, Inc. is making big waves. Others are pointing to the pharmacy sector, a huge industry that Amazon has long wanted to get into but has largely lacked the resources to do so until now (Whole Foods gives Amazon a bunch of brick-and-mortar locations). Then there’s the cloud sector, where Amazon Web Services is expected to go from a $16.4 billion annual business today to a $43 billion annual business by 2022.
While those are the usual suspects that could drive Amazon’s next super-charged era of growth, the most likely catalyst is one that Amazon has been quietly working on for some time: digital video advertising.
According to CNBC, Amazon is more aggressively trying to get a piece of the digital video advertising pie. The company is seriously discussing ideas, such as pairing companies with video producers to produce sponsored content, which would put Amazon in even more direct competition with YouTube, owned by Alphabet Inc (NASDAQ:GOOGL).
I say more because Amazon already owns Twitch, a live-streaming platform for gamers, and has rolled out Amazon Video Direct, which is essentially Amazon’s mini-version of YouTube.Twitch is a power-player in a niche industry. Amazon Video Direct has gained some solid traction, but the content created through the platform still pales in comparison to the volume uploaded on YouTube.
But Amazon could pull the lever at any point to become a big player in the digital advertising space.
Why? Because Amazon is a retail behemoth with about as about as much data as anyone on consumers.
It’s important to understand that Amazon has become much more than just an online store. It has become the online store.
In December 2014, about 55% of online shopping trips started on a search engine. That number fell to 43% in December 2015, and 26% in December 2016.
So where are online shopping trips starting? Amazon. In December 2014, only 38% of online shopping trips started on Amazon. That number grew to 47% in December 2015, and 52% in December 2016.
Essentially, Amazon is growing its leadership position in the secular growth e-commerce market. That means they have a huge database of valuable consumer purchasing data. That information will only get more robust as more and more shoppers migrate online.
Amazon can leverage that data to not only create global content through Amazon Video, but also deliver more targeted video recommendations and launch hugely successful video advertising campaigns. In this sense, Amazon has all the tools to one day become a formidable competitor to YouTube.
But it won’t be easy.
There are two things to know about the digital video advertising space. One, it’s a huge growth industry. U.S. video ad spending is expected to reach $13.2 billion this year, and grow at a solid double-digit annual pace thereafter for the next several years. Two, the space is dominated by YouTube. More than one out of every five dollars in the U.S. digital ad space flows to YouTube, while essentially everyone that engages in digital video advertising allocates at least some portion of the budget to YouTube.
YouTube is both the “go-to” and a “must-have” in digital video advertising.
But YouTube won’t run in open fields forever. And Amazon has what it takes to start stealing some digital video advertising dollars.
Amazon won’t build out a perfect YouTube competitor overnight, but the company is strategically positioning itself as a viable competitor for digital video advertising dollars.
This digital video advertising boom may be the next big growth catalyst for AMZN stock. Or it may be huge market share gains in the grocery world. Or a disruptive entry into the pharmacy market, or continued secular growth in AWS.
The big takeaway is that Amazon has multiple, potentially game-changing catalysts on the horizon. Eventually, one, several, or all of them could materialize. At that point, AMZN stock will break out of its current trading range and explode higher.
As of this writing, Luke Lango was long AMZN and GOOG.