Amazon’s $51 billion secret weapon is hiding in plain sight

In the 30 years since then Amazon (AMZN -2.21%) was founded, it has become one of the most famous companies in the world. It is one of the top three most recognized companies, according to financial services firm IG Group, and was recently named one of the world’s most admired companies — for the eighth consecutive year — by wealth magazine.

The company rose to prominence as an online retailer with its instantly recognizable “smiley face” boxes, but has expanded its empire into cloud computing, personal electronics, streaming video and music, and most recently, artificial intelligence (AI).

Investors are most excited about the potential of AI, and cloud computing has long been Amazon’s biggest supporter. However, investors may be surprised to learn that another area of ​​the company’s business is generating the fastest growth.

Image source: Getty Images.

Lots of opportunities

The aforementioned diversity of Amazon’s business gives the company plenty of avenues for growth. For example, Amazon’s e-commerce business has grown 7% over the past 12 months. The past few years have taken a toll on the online retail segment as inflation has reduced consumer spending and shoppers have traded up to lower-priced products.

Amazon Web Services (AWS), the company’s cloud infrastructure service, has also suffered from a lack of spending in recent years. The cloud segment has grown by 15% in the past year as companies have also been reluctant to spend unnecessarily.

However, the unsung hero of Amazon’s business over the past year has been its digital advertising segment, which grew 24% over the past year, far outstripping the growth of Amazon’s other major business segments. The segment generated $51 billion in revenue over the past four quarters, but still has plenty of growth ahead.

The Amazon advantage

Amazon’s e-commerce site is the foundation of the company’s online advertising opportunity, the result of its highly valuable digital “real estate.” The company has a wealth of data on its customers’ online shopping habits.

A “sponsored” listing on Amazon’s site is more likely to be seen by shoppers, and the company’s algorithms ensure that product placements appear to customers who are highly motivated or most likely to make a purchase. While this is the cornerstone of Amazon’s advertising business, the company has many more opportunities to thrive.

Earlier this year, movies and TV shows on Amazon Prime Video began showing ads automatically to all viewers. Users are given the option to opt out of advertising for an additional fee of $2.99 ​​per month. The move could generate an additional $5.2 billion in revenue this year, according to estimates provided by the The Wall Street Journal.

In addition, live sports on Amazon, including NFL Football, include advertising by default, giving the company another way to increase its ad revenue. There are also advertising opportunities on Twitch (its video game streaming platform), the Internet Movie Database (IMDb) (its catalog of movie and television information), and a number of Amazon electronics.

Given the breadth of Amazon’s properties, it’s easy to see how the company continues to grow its advertising at a rapid pace.

More to come?

The emergence of generative AI will also play into Amazon’s digital advertising ambitions. The company has launched a number of tools to help advertisers on its platform. For example, Amazon offers an AI-powered image generator to help marketers create more relevant ads and a tool to help write more effective product descriptions.

Amazon has already become a powerhouse in the space and is now the third largest digital advertiser in the world, behind just Alphabetof Google and Meta platforms. However, given the significant upside, the stock is surprisingly affordable. At just 3x sales, Amazon represents a compelling opportunity for investors.