It turned out to be powerful Amazon (AMZN -0.73%) It is not immune to the adverse effects of inflation and rising interest rates. For example, quarterly revenue growth rates for its North American and global e-commerce segments peaked in the first quarter of 2021.. Worse, both e-commerce businesses are headed for an unprofitable fourth quarter in 2022..
In the case of Amazon Web Services (AWS), revenue has been steadily declining over the past several years as competition intensifies and the law of numbers dictates that the larger a company grows, the more difficult it is to achieve early growth rates.
For example, in the fourth quarter of 2018, AWS grew revenue by 45% year-over-year, and in the fourth quarter of 2022, the cloud segment recorded only 20% year-over-year revenue growth. Additionally, AWS’s operating income fell 2 percent year-over-year in the latest fourth quarter.
As Amazon’s primary growth engines have given investors little to cheer about since the 2021 quarter, investors have been impressed by the growth potential of Amazon’s nascent digital advertising business. However, since Alphabet (NASDAQ: GOOGL ) (NASDAQ:GOOG) Google Ads Business and Meta platforms (NASDAQ: META ) A family of app businesses, including Facebook, has dominated the online advertising industry for a decade, and the question is whether Amazon’s ad business is worth the attention of investors.
His ad department is taking share.
According to an article published by Axios citing the information obtained from the internal intelligence, Google and Meta in 2010 When combined in 2022, they will have a market share below 50 percent for the first time in eight years. These statistics show that both companies are losing market share, the main reason being that Amazon will end up with a 7.3% digital advertising market share in 2022. Still, analysts estimate that share will explode to nearly 13 percent by 2024.
Many advertisers are attracted to Amazon ads because it is the most effective and inexpensive way to advertise online.
According to Feedvisor, citing a 2020 survey of more than 1,000 brands, 36% of all brands say Amazon generates the most revenue from media spend, followed by paid social at 29% and Google at 27%. Even better, 59 percent of brands on Amazon’s e-commerce marketplace say media spend drives the most revenue, followed by Google at 22 percent and social at 17 percent.
As far as spending, according to a report According to e-commerce analytics firm Celix, Amazon ads are 68% cheaper than Google, 44% cheaper than Facebook, 79% cheaper than Instagram and 13% cheaper than its e-commerce competitor. Walmart (NYSE: WMT ).
Why are investors interested in the advertising segment?
While Alphabet’s advertising division and Meta Advertising lost nearly 4% year-over-year in the fourth quarter, Amazon’s advertising division generated 19% year-over-year revenue, although global media company Magna Global’s The AWS division’s 20% revenue growth in the fourth quarter was even better for it. However, the main reason behind the investors’ high interest in the advertising segment is that it is probably the most profitable of the business.
While the company does not disclose the profitability of its advertising business, analysts have compared Amazon’s ad revenue to the profitability of Google and Meta’s ad units and used a few assumptions. Most analysts conclude that Amazon’s advertising division is more profitable than AWS.
Additionally, AWS requires significant capital investment, long-term investments in real estate, equipment, land, computers, and software to operate cloud businesses. On the fourth quarter 2021 earnings call, Chief Financial Officer Brian Olsavsky revealed that for the first time ever, less than 40 percent of capital expenditures will be to support AWS.
Let’s say it’s true; In the year By 2022, $25 billion in capital expenditures have gone into supporting AWS, while AWS only produced $22.84 billion in operating income in the same year. Amazon uses all of the AWS segment’s operating income to pay the cloud segment’s capital costs. So AWS currently has poor free cash flow. And if you consider that advertising is a less capital-intensive business, it will generate better free cash flow than AWS.
So however you want to analyze it, advertising is the fastest-growing, most profitable growth engine for Amazon and perhaps its most valuable business.
Foggy short-term future
Amazon shareholders need to understand that an economic downturn is not good for any business, including advertising, based on the health of e-commerce markets.
Let’s say you want to invest in Amazon stock to get the long-term potential in advertising. Before you get better, know that things are about to get worse and that the advertising business is not going to save the day.
Still, as the economy normalizes over the next year or two, the ad business will be a very significant growth engine and a strong thesis to be a shareholder.
Alphabet CEO Susan Frey is a member of The Motley Fool’s board of directors. John McKee, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of the Motley Fool’s board of directors. Randy Zuckerberg, former director of market development and Facebook spokesperson and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Rob Starks Jr has positions in Alphabet and Amazon.com. The Motley Fool has positions and recommends Alphabet, Amazon.com, Meta Platforms, and Walmart. The Motley Fool has a disclosure policy.