We already know how Amazon (NASDAQ:AMZN) has changed the face of retail and is an e-commerce juggernaut. But the tech giant is quickly becoming more than just a one-trick pony. There are lots of moving parts to AMZN and many of them are doing quite well in bolstering Amazon’s bottom line. Heck, Amazon Web Services alone pulls in about $6 billion in revenue for the tech giant.
But, perhaps the fastest generator of revenue for Amazon is a small side business that is turning into a juggernaut of its own. One, that gets its cues directly from another online kingpin Google (NASDAQ:GOOG).
That’s right, we’re talking about selling digital advertising.
And it turns out, like many of the things that Amazon does, it’s darn good at selling advertising as well. Its digital ad platform is growing like weeds. For investors, it’s just another reason not to bet against AMZN stock.
Amazon Takes On Google
Selling online ads is an amazingly profitable business. It is what has turned Google and Facebook (NYSE:FB) into high-flying stocks and cash-generating machines. And it’s quickly doing the same for Amazon.
Advertising at AMZN isn’t necessarily new. The retailer has long sold ads for sponsored products in its search results for sponsored keywords. Meanwhile, banner adds and similar sponsored messages dot its wholly owned websites like the Internet Movie Database (IMDb) and shoe retailer Zappos.com. But lately, Amazon has taken its advertising to a whole other level by aggressively placing and targeting these sponsored ads on its pages.
How sponsored ads work is that vendors bid in what are essentially auctions to have their products show up alongside a related search term. So, if your Proctor & Gamble (NYSE:PG), you pay Amazon a fee to have Tide be the top sponsored ad when shoppers type in the word “detergent”. But how the auctions/key words work is that PG isn’t just limited to “detergent.” They can pay to be the top sponsored ad when someone types in “Seventh Generation detergent” — which is owned by rival Unilever (NYSE:UL). It won’t be until you scroll past the sponsored ads that you’d see the organic search results for that query.
The beauty is Amazon makes a ton of money in this situation. Both PG and UL will spend like crazy in order to have their products be the top results for the search. Costs per impression have surged over 65% year over year, as Amazon has unveiled these new sponsored ad pages. Moreover, it doesn’t mater if you click on the sponsored ad or scroll down and click on the organic results, AMZN still gets the sale and ships you the product.
Here is where it starts to get interesting for Amazon and its advertising. Much like Facebook and Google, AMZN knows a lot about you. It knows what books you read, what music you listen to, what shows your children watch and, thanks to your Alexa-connected thermostat, it knows you turn the heat down to 65 degrees every night at 9:30. That’s an insane amount of data — the kind of data that advertisers will pay a huge sum of money for. Amazon is starting to let advertisers see and massage some of this data for banner ads as well as more targeted sponsored product ads. If your data history implies that you always buy organic, green, clean, etc., there’s no point in PG selling you an ad for regular Tide when you search for detergent. But you may want Tide Purclean.
Perhaps the most insane thing is that this is just the tip of the iceberg. For example, Amazon Prime video platform and its various devices. Right now, these have been mostly ad free — minus Amazon-produced shows. However, AMZN has been running adds on its streams of the NFL’s Thursday night football games and it started running ads during streams on its Twitch video game network.
Want even more ad opportunities for Amazon? How about ads being delivered with your orders. Verizon (NYSE:VZ) is test marketing placing ads for its Fios service on AMZN cardboard packages. These boxes will only be used for customers in ZIP codes that offer Fios, but who do not already have the service. As I said, Amazon knows a lot of about you.
Paying Off Big Time for Amazon
All of these ad efforts are paying off big time for Amazon. According to data from marketing agency Merkle, year-over-year spending on sponsored product advertisements increased 165% in the second quarter of 2018. Amazon doesn’t officially break out ads as a separate business yet and lumps it in with other segments. More importantly, those dollars are coming directly from Google and Facebook’s wallets. According to several CNBC interviews with ad execs, clients are moving 50% to 60% of their specific allocated Google search ad dollars directly to Amazon
The reason is twofold. One, advertising on Amazon’s platform results in direct purchases of products and the integration from ad-to-store is seamless. And, two, public distrust — especially for FB — is basically non-existent at this point. Data breaches have left users limiting their time on these other platforms.
As a result, revenues for advertising at Amazon are skyrocketing. According to eMarketer, AMZN did about $2 billion in ad revenue during the first quarter alone and is estimated to earn about $3.7 billion in total ad revenue this year. While that’s a drop in the bucket for GOOG, it’s huge year-over-year growth and shows that AMZN is quickly becoming a tour de force in the sector.
Just Another Reason to Buy Amazon Stock
Advertising is just getting started. And plenty of potential for additional ways for Amazon to generate more revenues — just wait ’til you’re getting Coca-Cola (NYSE:KO) ads over your Alexa/Echo devices — AMZN has another very powerful revenue driver. The beauty is that margins for digital ads, in general, are sky high.
All in all, advertising just enhances AMZN stock even more. For investors, its proof that Amazon really is the king of the FANGs.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.