Almost everything you need to know Amazon's (AMZN 2.71%) The company's fourth-quarter results meant that its stock price rose nearly 10% after the announcement. Yes, the fourth quarter results were very good.
Lower costs have increased profits on the company's online shopping platform. Amazon Web Services (AWS) revenue increased 13% year over year. But while it was great news for these sectors, there was even more great news. Amazon's fastest-growing business so far isn't e-commerce or cloud services.
add things up
Amazon CEO Andy Jassy said during the company's fourth-quarter earnings call that advertising revenue soared 26% year over year. This is approximately twice the growth rate of net sales for the company's North America and AWS segments as a whole. This also significantly outpaced the nearly 17% year-on-year sales growth in the international division.
CFO Brian Olsabsky noted that the impressive growth in advertising revenue was largely due to the performance of sponsored products, which allow advertisers to run ads promoting their products on Amazon's e-commerce platform. You can choose which keywords to target, or you can allow Amazon's system to target keywords automatically.
Olsavsky said Amazon's “teams have worked hard to leverage machine learning to make the ads we show our customers more relevant.” He added that the company continues to improve the tools that allow advertisers to measure the return on investment of their ad spend.
Further in the future
Olsavsky said the trend of increasing advertising revenue should continue. And there are reasons to expect growth to accelerate.
Amazon recently started selling ads on its Prime Video streaming service. Customers can opt out of advertising by paying an additional monthly fee. All of Prime Video's advertising-generated revenue occurred after the company's fourth quarter ended.
In general, streaming advertising is a top priority for Amazon. Olsavsky said the company is looking at ways to increase 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 easier for advertisers to put money into its platform. For example, Jassy said the company is building a tool that allows advertisers to upload a photo with AI-generated AI and create ad copy based on that photo.
Amazon additional benefits
Advertising on Prime Video could also bring additional profits for Amazon. “We have increasing confidence that Prime Video can be a large and profitable business on its own,” Jassy said on the fourth-quarter conference call. Advertising revenue could help make this scenario a reality.
Amazon's profitability is already steadily increasing. The company's revenue for the fourth quarter jumped to $10.6 billion from $300 million a year earlier. His Jassy vision for Prime Video to become profitable will further help.
But Amazon has a different perspective here as well. Jassy said advertising on Prime Video will allow the company to “continue to make meaningful investments in content over the long term.” New and engaging content can attract more subscribers to Amazon Prime.
That's a big deal for Amazon. american bank Analysts once estimated that Prime members spend nearly four times as much as non-Prime shoppers.
Should you buy Amazon stock because of advertising?
I don't think the rapid growth of Amazon's advertising business is the main reason to buy the stock. In my view, the strong AI tailwinds for AWS rank among the best things Amazon is working on.
But the best stocks give investors multiple reasons to buy. And I would argue that Amazon is one of the best stocks. The growth of advertising has made it even better.
Bank of America is an advertising partner of The Motley Fool's Ascent. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool's board of directors. Keith Speights has positions at 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.
