NEWS

Good News for Amazon: Advertisers Are Spending More Online

Dec 12, 2021

The e-commerce giant has been gaining ground in the advertising market.

Key Points

  • Global ad spending is expected to rise 22.5% this year.
  • Digital advertising will consist of 64.4% of the total in 2021.
  • Amazon reported $8.1 billion in ad revenue in its most recent quarter.

It may be a curious phenomenon that Amazon (NASDAQ:AMZN) is happy about increasing ad spending, but it's true. Over the past few years, Amazon has built itself into an advertising giant. The company is generating an increasing share of its revenue from advertising, and since that revenue tends to be more profitable than the overall business, it's become an essential element. 

For that reason, Amazon and its stockholders must be thrilled with a recent Wall Street Journal article that highlights advertisers are spending much more online this year.

A person holding credit card and phone and paying for something on a laptop.

Image source: Getty Images.

Advertisers are finding online spending more lucrative

According to GroupM, global ad spending will grow 22.5% to $763 billion this year. That's the second revision upward from GroupM since it first gave estimates in December 2020. After many businesses had to shut their doors to customers in the early stages of the pandemic, this year has consisted of vast reopenings worldwide. That's given cause for advertisers to increase spending: to get the word out that they are open for business again.

Interestingly, digital advertising will encompass 64.4% of the total in 2021, up from 60.5% in 2020 and 52.1% in 2019. The rapid shift to online advertising is not entirely surprising. Typically, marketers can more effectively measure the returns from online advertising. For instance, it's difficult to calculate how many people heard a radio advertisement or viewed an ad placed in a newspaper.

Indeed, you can get approximations by looking at estimated listener audiences or subscribers to the newspaper, but they will be far from precise. Compare that with digital ad spending, where marketers can see how many folks viewed the ad and how many clicked on a link.

Moreover, with the proliferation of online shopping, it only makes sense to increase advertising online. People browsing the internet on their computers or phones typically have a payment method on file. If they see a compelling advertisement, they are only a few clicks away from purchasing. 

Amazon is already benefiting from the shift

Amazon does not break out how much it makes from advertising specifically. However, it states that one of its segments consists primarily of ad revenue. In its most recent quarter ended Sept. 30, the segment that contains advertising reported revenue of $8.1 billion. That was up by 49% from the same quarter the year before. Amazon is home to hundreds of millions of shoppers who are one click away from purchasing, making it a desired online destination for ad spending.

"We've also seen strong growth in our advertising products as vendors and sellers have embraced their ability to build their brands and reach customers just as they consider their purchases," CFO Brian Olsavsky said during the company's Q3 conference call.

Indeed, ad revenue has almost doubled at Amazon since Q2 2020, growing from $4.2 billion to the $8.1 billion mentioned earlier. As folks keep looking to Amazon for their shopping needs, advertisers will increasingly be interested in gaining their attention in the meantime.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Parkev Tatevosian owns Amazon. The Motley Fool owns and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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