Amzwizard learned that in addition to e-commerce and cloud business, the advertising business is Amazon（ AMZN.US ）The third largest source of income. In addition, Amazon has become the third largest online advertising platform in the United States, second only to Facebook（ FB.US ）And Google（ GOOG.US )。 According to emarketer, a market research firm, Amazon’s advertising revenue in the United States will rise to 7% in 2020. By then, the duopoly market share of Facebook and Google will drop from 57.7% in 2018 to 55.9% in 2020.

As more and more businesses swarm into Amazon’s ecosystem, brands that want to stand out begin to invest heavily in advertising on their platforms. Benefiting from this, Amazon’s “other departments”, which are almost entirely composed of advertising business, are currently growing faster than retail, cloud computing and member subscription departments. “I don’t think Wall Street has enough recognition of the potential of Amazon’s advertising business,” said Andrew lipsman, chief analyst at emarketer. By traditional standards, we still expect Google to have stable, if not strong, growth in 2020 and 2021, but Amazon is eating away at that growth. ”

From duopoly to tripartite confrontation

For a long time, Google and Facebook occupied the largest market share of the digital advertising industry. However, Amazon’s rapid growth in this field makes it increasingly form a “tripartite” competition pattern. According to emarketer, Amazon’s digital advertising market share will increase to more than 10% of its total spending in 2020. Even before the health incident, Amazon’s annual growth rate in this field was more than 40%. The rapid growth of this high profit area has greatly boosted people’s bullish sentiment towards Amazon stock.

Faster growth than retail

If Amazon wants to improve its profitability, it should increase its share of revenue contribution from areas such as AWS and advertising. Over the past few quarters, investors have seen a good trend in this area. Before the outbreak of the health incident, the annual growth rate of Amazon’s online store was between 15% and 20%. On the other hand, the advertising business is growing at a rate of 40% – 45%. As a result, the share of revenue in this area has grown significantly in the past few quarters.

With health incidents under control, the annual growth rate of online stores is likely to fall back to the previous range of 15% to 20%. Amazon is likely to keep its advertising business growing while its online sales growth slows, just as it did before the health crisis.

According to the data, in the second quarter of 2019, Amazon’s advertising revenue was close to $3 billion, while the revenue of online stores was $31 billion. This makes the revenue share of the advertising department 9.67% higher than the sales of online stores. In the most recent quarter, advertising revenue increased to $5.4 billion and online store sales to $48.3 billion. As a result, the current share of advertising revenue is 11.2% compared to online stores.

It is worth noting that the health incident has temporarily stimulated the sales of online stores, while the digital advertising market has been affected by the savings of advertisers. According to the current growth trend, by the end of 2022, Amazon’s advertising revenue will account for more than 15% of the total revenue. By 2023, the advertising business will reach $50 billion. This will significantly increase the company’s overall profit margin and allow more investment in other projects.

Impact on profit margin and valuation

Digital advertising is one of the most profitable industries in the world. Despite the rapid growth in revenue, Google and Facebook both show healthy profit margins. By comparing with Facebook, we can see the independent valuation of Amazon’s advertising business. Facebook’s 2016 P / E ratio was close to 20, when its TTM revenue was $20 billion and its revenue growth rate was 40%.

On the other hand, Amazon’s advertising revenue in the past 12 months was $18 billion, with a year-on-year growth rate of 40-50%. Therefore, separately, the P / S ratio of Amazon’s advertising business may be between 20-25. That would value Amazon’s advertising business at nearly $400 billion, or 25% of its total market value.

It is worth noting that for every extra dollar Amazon earns in the advertising business, the company will have a higher profit margin, which can provide financial support for future investment in other growth runways. Therefore, Amazon has a huge halo effect, advertising revenue will eventually create greater growth potential for the overall business. This doesn’t exist on Facebook because almost all of its revenue comes from advertising.

If this is taken into account, Amazon’s advertising department may be pricing higher than Facebook’s P / E ratio at a similar level of revenue. Although Amazon, like Google and Facebook, analyzes users based on data, it lacks a lot of guesswork and has a high degree of certainty. For example, if you want to push the advertisement of protein powder products, Google may push it to users who have searched for fitness; Facebook may push it to users who have joined the fitness community; and Amazon can directly push it to users who have purchased or collected fitness products. This will help the company attract more advertising and improve its future growth trajectory.

But for now, the success of the advertising business is not fully reflected in Amazon’s share price. Even at conservative independent valuations, the advertising business will be valued at $400 billion, equivalent to 25% of Amazon’s total market value. Growth in this area is likely to exceed expectations in the coming quarters, which will help the stock gain a better bullish momentum.

Conclusion

The advertising department is becoming one of Amazon’s most powerful business areas. The company has successfully broken the duopoly of Google and Facebook in the digital advertising market. To be sure, Amazon will expand its current share of the advertising market, because it is growing much faster than the first two.

The business is also the company’s fastest-growing business, easily beating the growth rate of AWS, its online sales and subscription business. Therefore, higher profit margin and growing advertising revenue share will become a strong driving force for the company’s future profit growth. On its own, compared with other peers, the value of advertising business should exceed $400 billion. If we consider the future growth mode and its impact on Amazon’s overall business, the value of advertising business may be higher in the short term, which will improve the growth potential of Amazon’s stock.