The Impact of Advertising on Amazon's Revenue and What it Means for Investors

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2022-04-12

Most companies published their Q4 earnings from 2021 around the start of this year, and Amazon$Amazon.com(AMZN)$ was no exception — but the eCommerce giant has made a significant change in how it reports its revenue. The company used a separate segment for its advertising revenue for the first time, allowing investors and the general public to see a more detailed breakdown of its activities, successes, and failures. Let’s run through what the move means for Amazon and analyze the results from its advertising.A new segmentAlthough most people think of Amazon solely as a place for online shopping, it’s fast becoming a go-to destination for companies to advertise their products.

Considering its customer base and eye-watering revenue (around $100 billion in Q4), this shouldn’t come as a huge surprise.Its advertising revenue has continued to grow, to the point where it was overly prominent in its previous segment, so the company’s management decided it made sense to finally make it a segment in its own right. As we’re now entering a new fiscal year in the U.S., the timing was likely also a factor. But exactly how big is advertising for Amazon, and what form does it take?Ad revenue resultsIn Q4 of 2021, Amazon’s advertising revenue hit $9.7 billion. This represents a 33% increase compared to Q4 of 2020 (although it wasn’t a separate segment back then, the revenue itself was still reported). It’s not quite Amazon’s record for the highest revenue growth for advertising in a quarter — that record goes to Q2 of 2021, when there was a rise of 88% — but it’s still a very healthy number.

Still, it pales in comparison to Amazon’s total revenue, representing only around 7% of the company’s total income in Q4. However, it’s higher than some of Amazon’s other additional revenue sources, such as Prime memberships. It’s only a little behind Amazon Web Services, which makes up around 13% of total revenue.Digital advertising has been consistently rising over the last few years, with an increasing number of companies realizing the value of marketing themselves across digital channels — whether that’s social media or online shopping platforms like Amazon. It allows them to reach a more targeted demographic (e.g., certain ages or interest), and means they can access data about their marketing efforts to fine-tune their approach.

Global advertising spending in 2021 was around $763 billion, and this is projected to grow to more than $1 trillion by 2026, so it’s no wonder that Amazon wants to double-down on its efforts.But let’s look a little deeper at the types of ads Amazon is promoting and what it means for the company's future.Types of adsWhen you’re browsing Amazon, it’s not immediately obvious that it’s showing adverts. After all, the site doesn’t contain banner ads on the side encouraging you to navigate to other pages. However, it does contain its fair share of advertising if you know where to look. Amazon’s adverts fit into the following three categories:

  • Sponsored product ads: Promote products on search results page and product pages.
  • Sponsored brands ads: Place up to three products belonging to the same brand on search results.
  • Product display ads: Target customers based on their interests rather than the keywords they use.

All three of these options are pay-per-click (PPC) ads, meaning that advertisers pay every time someone clicks on an ad. They all work by promoting products from third-party sellers (who make up the majority of sales on Amazon) through other products, but have slightly different approaches.

Amazon also places adverts on the wake screens of its Amazon Fire tablets, but this is currently a smaller portion of its advertising efforts.Impact on stock priceThe news about the emergence Amazon’s advertising segment broke in early February, at which point Amazon’s stock price had already plummeted from $3,304 to $2,776. However, shortly after the announcement, its price increased to $3,228 in a matter of days.

The move showed investors the potential of Amazon’s business model — not only is it able to make money from selling products, but also by selling tailored ads to the people making the purchases.Although the stock price went on to dip again in early March (to $2,720), it has since recovered all the way to $3,379.

However, this is at least partly due to the overall recovery of the stock market, so it’s hard to attribute this activity to the advertising segment specifically. Overall, it seems the future looks bright for Amazon, yet its stock price is still far below its high point from earlier this year. Could now be a good time for new investors to buy shares?

Source: Yahoo Finance

Toward a data-driven futureThe success of Amazon’s advertising shows the value a company can offer once it reaches a certain size and continues to expand its services. Amazon now has access to ample amounts of data and high numbers of customers that rely on its services, making it invaluable to marketers and businesses. Using all this to advertise makes a lot of sense, so it’s no wonder that the revenue from its advertising is doing well.

Amazon shares have gained lagged the broader market over the past year (-10.4% vs +9%) on persistent worries that the company's Covid outperformance was at the expense of future results. There is also the issue of growth stocks in the Fed tightening cycle.

These are reasonable issues, but the Zacks analyst sees the company well positioned for the long run given solid Prime momentum and solid positioning the cloud space (Amazon Web Services or AWS). Further, robust Alexa skills and expanding smart home products portfolio are positives.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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