Pivotal’s coverage of Amazon was spurred this summer at Cannes and in conversations with marketers about the looming presence of the Amazon Advertising Platform, said senior analyst Brian Wieser.
Industry execs spoke about Amazon with a sense of urgency that crystallized how its ad platform, and commerce in general, would reshape how marketers allocated investments, he told AdExchanger.
Amazon’s “Other revenues” category, about 90% of which is media and ad tech, was on pace for $10 billion in 2018. While Pivotal doesn’t believe Amazon’s revenue will catch Google’s and Facebook’s in five years, estimated to be $215 billion and $59 billion respectively, adding almost $30 billion in ad revenue will make Amazon a clear “third force” in data-driven advertising.
The “Other revenues” category jumped in 2018 because of an accounting change where Amazon categorized retail trade promotions as advertising.
While these trade marketing budgets accounted for about $3 billion of Amazon’s $9 billion ad revenue last year and are growing fast, Wieser said Amazon’s conventional programmatic revenue is a more significant opportunity.
Unlike Google and Facebook, Amazon’s advertising revenue comes primarily from network partners, not owned and operated media, so it can dial up ads based on how it prioritizes profit and sales volume. For instance, if Amazon suddenly decided to give a higher percent of each transaction to ad partners, its ad network and overall sales could light up while profitability remained unchanged.
Advertising is the lifeblood of Google or Facebook, but for Amazon, advertising is just one of many lines of business, so Amazon has the luxury of getting its profits from other areas if it chooses to. Consequently, Amazon defies standard investment modeling.
Wieser said there’s a high degree of guesswork in forecasting ad revenue and modeling a business like Amazon.
“My understanding from speaking with people in the industry is that Amazon’s retail, subscription-based and advertising revenues are fairly fluid,” he said. “Amazon will optimize revenue streams and profitability based on what it sees from consumers.”
Pivotal isn’t the only investment firm that has recently re-thought how to evaluate Amazon.
A year ago BMO Capital Markets changed its valuation methodology for Amazon to what it called “Stacked DCFs,” cumulatively valuing Amazon’s three primary businesses (the marketplace, AWS and advertising) instead of averaging them, thus giving Amazon higher multiples on revenue. “While it is unconventional, we believe this is an appropriate way to value the company,” wrote Dan Salmon, BMO Capital’s media and internet analyst, in the firm’s Amazon update.
This post was syndicated from Ad Exchanger.