• by Sarah Mahoney  @mahoney_sarah, December 21, 2023

Amazon’s fast-growing advertising business is currently basking in Wall Street’s spotlight, with several analysts recently publishing detailed reports on its growth potential.

Wedbush’s Scott Devitt is the latest to weigh in, describing Amazon’s ad trajectory as still in its “Day One” period. With the ecommerce giant on target to achieve $46.5 billion in ad revenue for the full year, “we believe Amazon's advertising opportunity remains early in its development,” he writes. While ad sales have historically been restricted by available inventory and the investment capacity of vendors and third-party sellers looking to buy those ads, he sees larger potential.

Those include the extension of Sponsored Product ads to properties off Amazon, which the company announced in August, and the ability to monetize Prime Video ads in 2024. Wedbush estimates that development could offer another $6.5 billion in incremental revenue potential.

“Ongoing efforts to attract non-endemic advertisers represent relatively untapped opportunities for Amazon as the company pursues a greater share of digital advertising revenue,” Devitt writes. “Combined, we see a sustainable runway of advertising revenue growth well above the gross merchandise volume of the core retail business.”

Amazon’s ad revenue grew more than 23% last year and now accounts for about 8% of the company’s total revenue. “And it has likely become the largest driver of operating profit, with margin in the 60% to 70% range,” Devitt writes.

That compares to profit margins in the single digits for Amazon’s retail business.

Amazon remains, by far, the alpha in the nascent retail media category, which Wedbush estimates will reach $140 billion by 2025, capturing about 21.6% of all digital ad spending. “As the privacy landscape continues to evolve, ecommerce platforms and large retailers are well-positioned to capture a greater share of digital advertising spending,” he says. “We expect retail media will be a beneficiary as advertisers turn to RMNs for personalized advertising and audience targeting informed by consented, first-party data.”

And he expects Amazon and Walmart to drive most of the channel’s dollar growth. But companies like Instacart, DoorDash, Uber, Chewy, Etsy, Wayfair, and Home Depot are also poised to find growth through ad sales.

Currently, Sponsored Product ads account for 70%-80% of Amazon’s overall advertising revenue, Wedbush says, citing reports from digital marketing platforms and commentary from experts. These are cost-per-click ads and promote individual product listings for Amazon sellers. But that’s changing fast, with new formats in beta, including display ads on Twitch and the introduction of Prime Video ads.

“Overall, we believe Amazon’s video ad opportunity is early, with the adoption of Prime Video ads and Sponsored TV ads to begin in earnest as 2024 progresses. We think Amazon’s proposition to advertisers is compelling with a large streaming audience, industry-leading data insights, and a broad spectrum of offerings to capture spending from SMBs and enterprises both on and off Amazon properties,” he adds.

Dewitt isn’t alone. Mark Shmulik, who covers Amazon at Bernstein, named Amazon one of the top picks for the year.

Thanks to Amazon’s high-margin ad business and the durability of that sector, recovering revenues in AWS, the company’s computing division, its retail leverage and its new, more disciplined approach to placing big bets, “Amazon is the best idea on the internet,” writes  Shmulik.

He estimates that Amazon’s operating income on its ad sales will reach $34 billion in 2024.