E-retail and cloud giant Amazon.com (NASDAQ:AMZN) is a seemingly unstoppable company with a seemingly unstoppable stock. While Amazon has proceeded to dominate both the e-commerce and public cloud services markets over the past decade, AMZN stock has powered from under $100 to nearly $2,000 today.
Believe it or not, the huge rally in AMZN stock may not be over yet.
How is that possible? Because Amazon continues to expand its business model into adjacent high-growth arenas, adding even more firepower to its already super-charged growth narrative.
Next up for Amazon? Digital advertising. Amazon.com is one of the most heavily visited websites in the world. Yet, among the group of heavily visited websites, Amazon.com is the only that doesn’t draw a majority of its revenues from digital advertising. Plus, relative to other heavily visited websites, Amazon’s digital ad business is tiny.
That won’t remain true for long. Amazon is rapidly building out its digital advertising business, and given peer monetization rates, Amazon still has a long way to go before that digital ad business maxes out. Indeed, in two to three years, Amazon’s biggest profit driver could be digital ads.
What does all that mean for AMZN stock? When profits go higher, AMZN stock heads higher. Over the next several years, profits will get a huge boost from digital ad business ramp. Thus, over the next several years, AMZN stock could shoot higher.
Here’s a deeper look.
Amazon’s Ad Business Is Oozing With Potential
Website analytics firm SimilarWeb recently released a report detailing the five most visited websites in the world. The big takeaway from the report? Amazon’s advertising business has a ton of potential.
The five most visited websites in the world, in order, are Google (NASDAQ:GOOGL, NASDAQ:GOOG), Facebook (NASDAQ:FB), YouTube, Amazon and Yahoo.
Among those five companies, four them derive a huge portion of their revenues from digital advertising. For example, Google’s advertising revenues comprised more than 85% of total revenues last year. Over at Facebook, the company drew 98% of its revenue in 2017 from ads.
The story is much different at Amazon. Last quarter, advertising revenues were around $2 billion, or less than 5% of the company’s total revenues.
In other words, Amazon is the only heavily visited website in the world that doesn’t derive 80%-plus of its revenues from digital advertising. Instead, the company drives less than 5% of its revenues with ads.
That implies big growth ahead if the company appropriately capitalizes on its massive web traffic with ads.
The Ad Business Could Contribute $5 Billion-Plus in Profits
In the big picture, Amazon’s ad business could contribute nearly $20 billion in revenues over the next several years. That isn’t that big for Amazon. But, the digital ad business is highly profitable, so that near $20 billion in revenues could flow into $5 billion-plus in profits. That would make digital ads the company’s biggest profit driver.
Last year, Facebook recorded ad revenues of $40 billion on 4.7 billion monthly visits. Google recorded ad revenues of $95 billion on 19.7 billion monthly visits (15.2 billion from Google and 4.5 billion from YouTube).
That means Facebook took home $8.50 in ad revenue per monthly visit, while Google took home around $4.80 in ad revenue per monthly visit. Importantly, both those metrics are growing over time as revenue growth is outpacing visitor growth.
Amazon’s ad business is on track to do $8 billion in revenues this year. Monthly visits number around 2 billion. That implies just $4 in advertising revenue per monthly visit, well off Google and Facebook levels.
In the long run, Amazon should be able to scale its ad monetization rates to Google and Facebook levels considering the platform’s plethora of data and wide global reach. At the midpoint, that implies about $6.70 in ad revenue per monthly visit. But, those metrics are growing over time. Thus, over the next several years, Amazon could get its monthly visit monetization rate up to $8.
Assuming Amazon’s web traffic continues to grow mildly to around 2.25 billion in a few years, then Amazon’s total ad business could generate around $18 billion in revenues in two to three years.
Google operates its ad business at 20%-plus margins. Facebook operates its ad business at 40%-plus margins. At the midpoint, Amazon should be able to operate its ad business around 30% margins, which would imply $5.4 billion in operating profits in a few years.
Amazon’s biggest profit driver right now is Amazon Web Services. Total operating profits from AWS were $4.3 billion last year. Thus, $5.4 billion in additional operating profits from digital advertising is a huge deal.
Bottom Line on AMZN Stock
When profits go higher, AMZN stock goes higher. Over the next several years, profits are set to soar thanks to digital advertising business ramp. This surge in profits will likely catalyze healthy gains in AMZN stock.
As of this writing, Luke Lango was long AMZN, GOOG and FB.