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The Latest on Amazon's Booming Advertising Business

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Amazon (AMZN - Free Report) has been considered the outright leader in the domestic e-commerce industry for years now, but a key part of the company’s recent growth—and its rapidly-rising stock—is its ongoing expansion beyond the realm of online retail.

Some of these expansion efforts have been the subject of much public attention, including the acquisition of Whole Foods and the continued development of Amazon Web Services. But at least one of the key reasons behind Amazon’s staggering earnings and revenue growth—its advertising business—might be flying under the radar.

When it comes to the digital advertising, companies like Google parent Alphabet (GOOGL - Free Report) and social media behemoth Facebook (FB - Free Report) snag most of the attention. Nevertheless, Amazon is quickly becoming a formidable online ad player in its own right.

In its most recent quarter, Amazon notched revenue of $2.03 billion in its “Other” segment, which primarily includes sales of advertising services. This might seem like a drop in the bucket compared to the nearly $27 billion it generated in the “Online Stores” unit, but with Other revenue up more than 130% from the year-ago period, it is clearly a growth catalyst worthy of investor attention.

So what does Amazon have to say about this booming business segment? Analysts on the company’s earnings conference call were certainly interested in hearing more, and the first question that Amazon CFO Brian T. Olsavsky focused on just that question.

“I would say advertising continues to be a bright spot both from a product standpoint and also financially. It continued to be a strong contributor to profitability in Q1. It's now a multibillion-dollar program,” Olsavsky said.

The crux of Amazon’s ad business is the sale of premium product placement when users search for certain items. Olsavsky described this as a benefit for both users, who are able to find new products “that they may not have seen otherwise,” as well emerging and established brands.

“I think the advertisers generally are all shapes and sizes, and their common theme is they all want to reach our customers generally to drive brand awareness, discovery and eventually purchase,” he added.

Investors should note that Amazon adopted a new accounting standard in 2018 which amended its revenue recognition policies. Based on this new model, certain advertising services were classified as revenue rather than a reduction in the cost of sales category. Amazon said this change added about $560 million to the Other revenue segment in the quarter.

Still, segment revenues improved significantly even when adjusting for this change, and investors note that advertising is a buoy for profitability because it operates with much better margins than the traditional e-commerce business.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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