Amazon.com's (NASDAQ: AMZN) advertising business continues to grow across several of its properties, and that high-margin revenue has the real potential to boost Amazon's profitability. The e-commerce giant has been steadily siphoning search traffic away from Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary Google, and product searches are easily among the most valuable queries.
Amazon's ad business has just hit a new milestone.
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Slowly catching up to Google and Facebook
eMarketer says that Amazon has just become the No. 3 digital ad platform in the U.S., overtaking Verizon subsidiary Oath and neighboring tech giant Microsoft. Google and Facebook (NASDAQ: FB) naturally remain the top two players. Amazon's ad business is expected to rake in over $4.6 billion in revenue from U.S. advertisers this year, according to eMarketer. Some of Amazon's recent progress was attributable to an accounting change.
However, it's worth noting that there's still a long way to go before Amazon comes anywhere close to Google or Facebook: Amazon is expected to grab a 4% share of digital ad spending in the U.S. this year. That's well below Facebook's 21% and Google's 37% expected 2018 market share. By 2020, Amazon could grow that share to 7%, according to eMarketer's predictions, which call for a compound annual growth rate (CAGR) of over 50% during that time frame. The digital ad market researcher previously predicted that the Facebook/Google duopoly will weaken in the years ahead.
Amazon is working hard to develop all of the necessary ad tech and tools that it will need to grow ad revenue, while also making it easier for advertisers to purchase ads. The company announced earlier this month that it was consolidating all of its advertising offerings under a new Amazon Advertising brand, which includes a simplified product portfolio.
Over time, merchants will be under increasing pressure to buy up advertising space to compete with other merchants, lest they lose visibility in the search results to sponsored listings. In that sense, every merchant on Amazon is potentially an advertising customer as well. That will be a potent growth driver for the ad business as merchants look to capitalize on all the highly qualified search traffic that Amazon commands. Advertising continues to be one of the most promising growth avenues for Amazon in the years ahead.
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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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Evan Niu, CFA owns shares of Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Facebook. The Motley Fool recommends VZ. The Motley Fool has a disclosure policy.