3 things you need to know about Amazon’s advertising business

Amazon (AMZN 1.31%) recently reported its second-quarter financial results, and Amazon Web Services (AWS) and the company’s e-commerce business once again received the most attention.

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

  1. Ad sales are growing faster than competitors
  2. The privacy changes won’t have much of an impact on Amazon ad sales.
  3. The company’s advertising market share is growing.

Let’s take a closer look at each.

Image source: Getty Images.

1. Amazon’s ad sales outpaced the growth of its competitors

Let’s start with what I think is a very important story about Amazon’s ad business: It’s growing while larger competitors are pulling back.

In the second quarter, Amazon’s ad sales rose 18% year over year to $8.8 billion. That’s not a huge amount for a company that generated $121 billion in total sales for the entire quarter, but the percentage increase is notable because ad competitors Meta platforms, Twitter, and A click all grew at slower rates.

For example, Snap’s ad revenue increased by 13%, Twitter’s only grew by 2%, and Meta’s actually decreased by 1.5%.

Some of these companies even cited a tough advertising environment, with Meta CEO Mark Zuckerberg saying in his company’s latest earnings call that “[W]It appears to have entered an economic downturn that will have a broad impact on the digital advertising business.”

Now contrast that with Amazon CFO Brian Olsavsky’s comments to analysts about the company’s earnings:

“I’m just going to add a little bit more on the ad because you’re probably wondering again about the softness — the potential for softness in that or macroeconomic factors. Right now, we’re still seeing strong ad growth … I think our advantage is that we have high-performing advertising.”

In short: Slow down? What delay? Of course, Amazon doesn’t make as much money as some of its advertising partners, so it’s easier for the company to achieve stronger percentage growth. But that doesn’t take away from the fact that Amazon’s ad business looks very strong right now, while some of its competitors are struggling.

2. Amazon isn’t worried about major changes to ad privacy

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

An 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 for their entire business (think Meta) are already suffering from these changes. Meanwhile, Amazon shrugs.

Amazon doesn’t have to worry too much about the death of cookies because it runs its own massive e-commerce platform where advertisers knock on Amazon’s door to get them on the site.

And since Amazon doesn’t have to worry about changing its advertising strategy as a result of these changes to user tracking, some advertisers will likely be more willing to spend their money on Amazon’s platform than elsewhere.

3. The company’s advertising market share is getting bigger

Finally, the continued growth of Amazon’s ads is starting to weaken the leaders with more market share. Consider that in 2019, Amazon held just 7.8% of the US digital advertising market, according to InsiderIntelligence, while AlphabetGoogle took the top spot with around 32% and Meta’s Facebook had around 24%.

But by next year, Amazon will take an estimated 14.6% of the digital ad market – up from 13.3% this year – while Google’s share will drop to 26.4% and Facebook’s market share will remain unchanged.

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

John Mackie, CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Suzanne Frey, CEO of Alphabet, is a member of The Motley Fool’s board of directors. Randy Zuckerberg, former Facebook CMO and spokesperson and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Chris Niger has positions in Apple. The Motley Fool has positions in and recommends Alphabet (A Share), Alphabet (C Share), Amazon, Apple, Meta Platforms, Inc. and Twitter. The Motley Fool recommends the following options: long March 2023 $120 Apple calls and short March 2023 $130 Apple calls. The Motley Fool has a disclosure policy.

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