Apr 28, 2023 - Economy & Business

Amazon sees huge potential in ads business as AWS growth flattens

Hope King, author of Axios Closer

Amazon's ad business is growing faster than its profit powerhouse, Amazon Web Services.

Why it matters: The pattern reflects yet another inflection point in Amazon's trajectory as a company, as well as the current, muddled economic environment.

By the numbers: Revenue from Amazon's ad products grew 21% in the first quarter from the same time last year to $9.5 billion.

AWS revenue grew 16% over the same time period to $21.4 billion.
Online sales grew 3% on a constant currency basis to $51.1 billion.

What they're saying: "Even in difficult economies, most people still shop and with the largest e-commerce shopping venue, we have a lot of customers that companies seek to reach," CEO Andy Jassy told analysts during a call on Thursday afternoon.

"In AWS, what we're seeing is enterprises continuing to be cautious in their spending in this uncertain time. Customers are looking for ways to save money however they can right now."

The big picture: AWS remains the largest provider of cloud services in the world, but its hold over the industry has shrunk as competitors Microsoft and Google have gained ground with Azure and Google Cloud, respectively.

Meanwhile, Amazon's been capturing more U.S. digital-advertising spend. Its share is expected to grow to 12.4% this year, according to estimates from Insider Intelligence, up from 11.7% in 2022.

Be smart: "The simplest way to look at [ads] is as a very profitable new business," long-time tech analyst Benedict Evans wrote last month.

While the $38 billion that Amazon made from ads in 2022 is a small fraction of the company's overall revenue that year of $502 billion, ads "probably had well over 50% operating margins, which would mean it brought in as much operating profit as AWS," according to Evans.

What to watch: Jassy on the call said the company is still "very early" in its efforts to place ads in video, live sports, audio and grocery. "We have a lot of upsides still in advertising."

Amazon shares spiked nearly 11% after hours immediately following the release of revenue numbers that beat estimates. But the stock turned around after analysts digested the company's lower-than-expected outlook for the second quarter.

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