This Is Amazon's Fastest-Growing Business by Far -- and It Isn't E-Commerce or Cloud Services

Posted

Pretty much all you have to know about Amazon's (NASDAQ: AMZN) fourth-quarter results is that the stock jumped close to 10% after they were announced. Yes, the Q4 results were that good.

Lower costs boosted profits for the company's online shopping platform. Revenue for Amazon Web Services (AWS) vaulted 13% higher year over year. But as great as the news was for these units, there was an even better story: Amazon's fastest-growing business, by far, isn't e-commerce or cloud services.

Adding things up

Amazon CEO Andy Jassy said in the company's Q4 earnings conference call that advertising revenue soared 26% year over year. That's roughly double the growth rate for the company's overall North America segment and AWS segment net sales. It's also well ahead of the international segment's year-over-year sales growth of nearly 17%.

CFO Brian Olsavsky noted that the impressive growth in advertising revenue was largely the result of sponsored products, where advertisers can run ads on Amazon's e-commerce platform that promote their products. They can choose the keywords they want to target or allow Amazon's systems to target keywords automatically.

Olsavsky said that Amazon's "teams worked hard to increase the relevancy of the ads we show customers by leveraging machine learning." He added that the company continues to improve the tools that enable advertisers to measure the return on investment for their advertising spending.

More to come

The trend of advertising revenue growth should continue, according to Olsavsky. And there are reasons to expect that the growth will accelerate.

Amazon recently began selling ads on its Prime Video streaming service. Customers can opt out of the ads by paying extra each month. All of the revenue generated by Prime Video advertising came after the end of the company's fourth quarter.

Streaming advertising, in general, is a top priority for Amazon. Olsavsky stated that the company is exploring ways to boost advertising not only on Prime Video, but also on Fire TV, FreeVee, and live-streaming service Twitch.

Amazon is also working hard to make it easy for advertisers to spend their money on its platforms. For example, Jassy mentioned that the company is creating tools that enable advertisers to upload a picture with generative AI creating advertising copy based on the picture, and vice versa.

Extra benefits for Amazon

Advertising on Prime Video could also provide extra benefits for Amazon. Jassy said in the Q4 call, "We have increasing conviction that Prime Video can be a large and profitable business on its own." Ad revenue could help make this scenario a reality.

Amazon's profitability is already increasing nicely. In Q4, the company's earnings skyrocketed to $10.6 billion from $0.3 billion in the prior-year period. Jassy's vision of Prime Video becoming profitable would help even more.

But there's another angle for Amazon here, too. Jassy stated that ads on Prime Video will enable the company to "continue investing meaningfully in content over time." New compelling content could attract more subscribers to Amazon Prime.

That's a big deal for Amazon. Bank of America analysts once estimated that Prime members spend close to four times more than non-Prime shoppers.

Should you buy Amazon stock because of advertising?

I don't think that Amazon's fast-growing advertising business is the main reason to buy the stock. My view is that the strong AI tailwind for AWS ranks as the best thing Amazon has going for it.

However, the best stocks give investors multiple reasons to buy. And I'd argue that Amazon is one of the best stocks around. Its advertising growth makes it even better.

Should you invest $1,000 in Amazon right now?

Before you buy stock in Amazon, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Amazon wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of February 6, 2024Bank of America is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Keith Speights has positions in Amazon and Bank of America. The Motley Fool has positions in and recommends Amazon and Bank of America. The Motley Fool has a disclosure policy.

AMZN, 2219a551-0a7b-4cc4-93b1-aebe26f5eb1e, investing