I think 2018 will be the year that Amazon (AMZN) finally starts motoring on all cylinders.
Not that the stock has done all that badly in 2017–up 56.5% year-to-date as of December 15–on its dominance of the e-commerce economy and it’s leading position in the Cloud services sector.
But 2018 will be the year when it becomes clear to the majority of investors that Amazon is an increasingly credible competitor to Alphabet’s Google (GOOG) in the search market and has emerged as the go to market for digital ad dollars. Those two areas represent fast-growing cash streams that will push this $1179 stock higher in 2018.
Amazon’s growing clout in search has been apparent–if below the radar–for a while now. But it’s market position has gotten to be big enough to draw increasing attention. In June 2016, for example, a survey of 1,000 consumers conducted by PowerReviews found that 38% started their online product search on Amazon. Google then was a close second on this part of the search market at 35%. Brand and retailer sites, in the aggregate, accounted for 21%. All other e-commerce site shared a 6% share of initial product searches.
A January 2017 survey found that the trend in initial product searches toward Amazon had accelerated. According to a survey by the investment bank Raymond James, more than 50% of people started their search for online shopping on Amazon. Only 26% used a search engine such as Google as a starting point.
Now obviously product search isn’t the entire search market but it is a lucrative part of that market–and as you might expect Amazon’s growing share of product search is showing up in increased digital ad dollars for Amazon.
In its third quarter earnings report Amazon reported that “other” review, which is mostly ad sales (and some revenue from the company’s credit card business) grew 58% year over year to $1.12 billion. That’s up from the 53% year over year growth rate in the second quarter. As you might imagine from the survey numbers of Amazon’s growing dominance of initial product search, sponsored product ads accounted for 82% of the ad dollars spent on Amazon.
Now Amazon’s ad business still trails Google’s and Facebook’s (FB). In that same third quarter Google reported ad sales of $24 billion.
But Amazon’s ad sales have clearly gone into a fast acceleration. Morgan Stanley estimates that Amazon’s ad revenue could hit $5 billion in 2018 And that it could hit $7 billion in ad revenue by 2020.
The Wall Street Journal recently reported that three of the world’s largest ad agencies are planning to increase their ad spend with Amazon. Publicis, for example, will increase Amazon ad spending to $300 million in 2018. WPP told the Journal that it expects to spend $200 million in 2017 and to increase that by as much as 50% in 2018. Omnicom projected that it would double its ad spending on Amazon to about $200 million in 2018.
All this provides another engine for Amazon’s revenue and earnings growth in 2018.
Amazon is a member of my 50 Stocks Portfolio.