3 things to know about Amazon’s advertising business

Amazon (AMZN -1.53%) recently released its second-quarter financial results, and Amazon Web Services (AWS) and the company’s e-commerce business have again attracted the most attention.

But savvy investors know that Amazon has a burgeoning advertising business that shouldn’t be overlooked. It’s important to note three key things happening in Amazon’s ad business:

  1. Ad sales are growing faster than its competitors
  2. Privacy changes will not have a major impact on Amazon ad sales.
  3. The company’s ad market share is increasing.

Let’s take a closer look at each one.

Image source: Getty Images.

1. Amazon’s ad sales outperformed its competitors’ growth

Let’s start with what I think is a very important action for Amazon’s ads business: It’s growing while larger competitors are retreating.

In the second quarter, Amazon’s ad sales rose 18% year over year to $8.8 billion. Now, that’s not a huge number for a company that made $121 billion in total revenue for the full quarter, but the percentage increase is notable because it’s touting competitors meta platforms, Twitter, and snap all grew more slowly.

For example, Snap’s ad revenue grew 13%, Twitter’s grew just 2%, and Meta’s actually declined 1.5%.

Some of these companies even highlighted a difficult advertising environment, with Meta CEO Mark Zuckerberg saying on his company’s recent earnings call: “[W]We appear to have entered an economic downturn that will have far-reaching implications for the digital advertising business.”

Now compare that to Amazon’s Chief Financial Officer Brian Olsavsky’s comments to analysts on his earnings call:

“I’m just going to add a little more about advertising because you’re probably wondering again about softness – potential for softness in that regard or macroeconomic factors. At the moment we are still seeing strong advertising growth…. I think that’s our advantage, we have high-efficiency advertising.”

In short: slowdown? What slowdown? Of course, Amazon doesn’t make as much money as some of its advertising peers, so it’s easier for the company to generate stronger percentage growth. But that doesn’t change the fact that Amazon’s ad business is looking very strong right now, while some of its peers are facing headwinds.

2. Amazon doesn’t fret over major ad privacy changes

You may have heard that the death of web tracking cookies is near. The internet industry is moving away from so-called cookies because online users don’t like them, because they don’t like having their every move online tracked.

Apple made a big change to its Safari browsers in 2020, drastically reducing the amount of tracking companies can do within the app. Companies that rely on third-party tracking (think Meta) for their entire business are already suffering from these changes. Meanwhile, Amazon shrugs.

Amazon doesn’t have to worry too much about the death of cookies, as it runs its own massive e-commerce platform, with advertisers knocking on Amazon’s door to let them onto the site.

And since Amazon doesn’t have to worry about changing its ad strategy in the wake of these user-tracking changes, some advertisers will likely be more inclined to spend their money on the Amazon platform than anywhere else.

3. The company’s ad market share will increase

And finally, Amazon’s continued ad growth is starting to break with the market leaders with larger market shares. Consider that Amazon held just 7.8% of the U.S. digital advertising market in 2019, according to InsiderIntelligence alphabet‘s Google took the top spot with about 32% and Meta’s Facebook had about 24%.

But by next year, Amazon is estimated to capture 14.6% of the digital advertising market — up from 13.3% this year — while Google’s share will have fallen to 26.4% and Facebook’s market share will remain flat.

So why should all this advertising growth matter to Amazon investors? The digital advertising market is expected to grow from $239 billion this year to $315 billion by 2025. And if Amazon gets a little more of that pie while its competitors are struggling to keep theirs, Amazon should be able to significantly increase its advertising revenue over the next few years.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Chris Neiger holds positions at Apple. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Meta Platforms, Inc., and Twitter. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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