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How Important Is Amazon's (AMZN) Growing Advertising Business?

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Amazon (AMZN - Free Report) is reportedly set to become the third largest digital advertiser in the U.S., behind Google (GOOGL - Free Report) and Facebook (FB - Free Report) . Now some advertisers have started to move large chunks of their Google ad budgets to Amazon. So, the question is why are advertisers shifting to the e-commerce giant? And why does it matter?

Advertising Growth

Amazon may soon be the beneficiary of shifting advertising spends. “Some advertisers are moving more than half of the budget they normally spend with Google search to Amazon ads instead, amounting to hundreds of millions of dollars,” according to a Monday CNBC report. The news outlet, citing multiple anonymous media agency executives, said that most of the movement has come from consumer packaged goods firms, like Procter & Gamble (PG - Free Report) .

Amazon ads have become attractive to these types of clients because they can correlate more directly to sales. Investors should note that the e-commerce and cloud computing powerhouse is expected to grab 4.1% of all domestic digital ad spending in 2018 to surpass Verizon’s (VZ - Free Report) Oath and Microsoft (MSFT - Free Report) , according to an eMarketer report. This still falls way behind Facebook’s 20.6% and Google’s 37.1% in terms of total market share.

But looking ahead, Amazon is projected to see its share of U.S. digital ad spending climb to 7% by 2020 to hit $10.92 billion. Amazon’s mobile ad revenues are also projected to skyrocket 242% to reach $1.61 billion this year to help it grab a 2.1% market share.

Jeff Bezos’ firm still has a long way to go to catch up to Google or Facebook, but clearly, Amazon’s ad business is headed in the right direction.

Ad Outlook

Last quarter, Amazon’s “Other” category—which housed its ad business—revenues jumped 132% to reach $2.19 billion. This unit was Amazon’s fastest growing business segment for the third straight quarter, but also its smallest. Meanwhile, the company’s AWS cloud computing business jumped 49% to $6.12 billion, while its Amazon Prime-heavy subscription unit climbed 55% to $3.41 billion.   

The company announced in early September that it will retire some of its old advertising divisions, such as Amazon Advertising Platform, and roll them into the new "Amazon Advertising” in a sign that advertising is set to become more of a focal point.

As the ad executives noted, Amazon offers clients, especially smaller retailers, a better chance at converting ad dollars into an actual sale. The e-commerce giant’s size has helped it become a go-to place for consumers to start their product search. Survata projected that roughly 49% of product searches begin on Amazon.

Looking ahead, Amazon is expected to see its quarterly revenues jump roughly 30% to reach $56.97 billion, based on our current Zacks Consensus Estimate.

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