Amazon.com (NASDAQ:AMZN) gave a rainbow to a down day on April 30 when it announced its first quarter results after the market closed. Amazon stock benefited from a net income of $10.31 billion, 98 cents per share and revenue of $143.3 billion both beat street estimates. Operating cash flow was $99.1 billion.
But the eye-opener for me was advertising revenue, $11.8 billion. This is now Amazon’s fastest growing business. Amazon also represents more than 10% of global digital advertising. But there’s more to this story. Advertising is letting Amazon become a power in artificial intelligence, at a profit.
Advertising and Amazon Stock
Amazon stock has always benefited from representing an infrastructure company. Whatever it makes, it resells, offsetting its costs and benefiting its business partners. This is the story of Amazon’s AWS cloud. It’s the story of its fulfillment services. The productivity Amazon enjoys radiates across the economy.
AI is working in the same way. This is the secret source of its advertising success. Amazon builds generative AI automation tools that give advertisers AI productivity. In this way Amazon ties the advertising industry to it.
This includes GenAI tools for designing ads, rolled out in October. It includes a conversational shopping assistant, rolled out in March. The idea, CEO Andy Jassy says, is advertising that doesn’t feel like advertising. It’s precisely what in-store employees are taught to do, sell when customers are ready to buy.
The result is a virtuous cycle. Amazon sells more ads, but Amazon also ties more companies to its AI tools. Their experience improves the AI tools, and Amazon uses that to sell more ads.
Creating Inventory
Amazon’s virtuous cycle in AI and advertising has created a need for more ad inventory. Amazon’s website provides inventory, but of a limited type. Once you’re on Amazon, you’re well down the sales funnel.
To expand the reach of its AI tools, Amazon is now buying ad inventory through programming. That’s what its FreeVee streaming service represents. It’s why the company is putting ads on Prime Video.
These spaces aren’t empty billboards, the kind you’d get buying ads from TV or cable networks. Amazon Prime ads offer the same precise targeting as those on its website. They also offer access to all of Amazon’s AI tools for luring prospects down the sales funnel once they’re found.
This includes third-party tools. Amazon’s AI is drawing startups to it, just as the Cloud and fulfillment services did. Examples include Vapa, a German company that runs Amazon ad campaigns. Or consider Xmars, a Los Angeles company that offers Amazon ad optimization.
Growth requires that Amazon draw big audiences for its sales funnel. That’s why it bought rights to football, to baseball, why it’s aiming for NBA rights. Sports draw reliable audiences at specific times, making it a new frontier for Amazon’s advertising AI tools.
Sponsored TV lets Amazon reach both new advertisers and new customers. It brings Amazon’s tools to the front of the sales funnel, then the Web site meets them halfway down. Amazon can make better use of its ad inventory than any TV network, because of its AI tools.
The Bottom Line
Many analysts see Amazon trailing Microsoft (NASDAQ:MSFT) in AI. That’s because Microsoft monetizes AI directly through tools like Co-Pilot. Some see Amazon as trailing Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META) which dominate the digital ad market.
I disagree. Amazon is tying its advertising and AI tools together. It’s using both to expand its third party networks.
That means Amazon is building the huge data sets needed for successful AI applications, at minimal cost and maximum profit. Amazon, unlike AI startups, has a solid business model thanks to advertising.
As of this writing, Dana Blankenhorn had a LONG position in AMZN, GOOGL, and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelineshorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his free Substack newsletter.
