If you had the chance to go back in time and invest in Google (GOOGL) – Get Alphabet Inc. Report or Facebook (FB) – Get Meta Platforms Inc. Report 20 years ago, would you? Well, destiny could be giving you a second chance to make similar gains.
For the first time ever, Amazon broke out revenues generated by its advertising segment — before last earnings call, the company had disclosed them within its “other” revenues. And the results might point to a new rising advertising star.
Figure 1: Amazon's Advertising Business Shoots for the Moon.
(Read more from the Amazon Maven: Amazon Stock: Could It Climb 72% In 2022?)
According to eMarketer, Amazon’s advertising business is expected to soar through the next year, reaching as much as 15% of the U.S. market by 2023. The current market leader, Google, is projected to lose a portion of its market share, while Meta (referred to as Facebook in the graph) will remain flat.
The rise of Amazon’s advertising business, combined with the decline of its competitors, suggests Amazon’s flywheel strategy has been stealing consumers from other platforms and locking them into Amazon’s main services.
Ultimately, this leads to the argument that Amazon’s businesses share a great synergy and any pressure to split the company (and by consequence breaking its flywheel) could, at the bare minimum, prevent significant gains in the future.
Figure 2: US triopoly digital ad revenue share, by company.
Google's Services operating margin was 37% in Q4 2021. Meta presented the same 37% for the period. Amazon’s cash cow, AWS, showed 29% of operating margins. Although Amazon didn't disclose its margins for the advertising segment, AWS might no longer be Amazon’s main profit provider in the future.
For instance, if we apply this 37% operating margin to Amazon’s $31 billion generated by advertising, we are left with $11.5 billion. Considering Amazon’s global advertising business growth will be proportional to its projection for America, in 2023 the company should generate $14.6 billion in operating profits. For the record, AWS’s operating income was $18 billion in 2021.
As Amazon has been silently creating its own advertising venture, the e-commerce and cloud-computing behemoth might be about to become an ad titan and pose a direct threat to both Google and Meta.
For the investors, this could be the chance to buy shares of an advertising company that is still in its cocoon. According to TipRanks, the average target price for the stock is $4,200, implying 36% upside for 2022.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Amazon Maven)
Equity research contributor for DM Martins Research, covering Amazon and the retail space at large. Economics and accounting background from the University of Sao Paulo, one of the top finance universities in Brazil.