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Founded in 1993 by brothers Tom and David Gardner, The Motley Fool is helping millions of people gain monetary freedom through our website, podcasts, books, a newspaper column, a radio show, and premium investment services.
Amazon (AMZN 3. 17%) is struggling to adapt to the reversal of the e-commerce momentum it experienced at the beginning of the pandemic. Now that billions of other people have been vaccinated against COVID-19 and other people are generally less involved in social distancing, the number of purchases they make at retail outlets is expanding again. Some investors see this as a red flag for stocks.
However, even with that in mind, there are at least two green flags for long-term investors at Amazon: its most successful internet segment is booming and it has developed a physically powerful advertising business.
In the first quarter, Amazon’s overall profit increased 8% compared to last year’s period. At the same time, Amazon Web Services’ profits grew 37%, compared to a 32% expansion last year. The tech giant is capitalizing on its leading position in the cloud as corporations look to move more of their virtual infrastructure off-site.
For enterprises and other institutions, the advantages of moving IT and knowledge storage to the cloud is that it frees them from gigantic investments of constant capital and replaces them with recurring usage-based expenses. According to Statista researchers, through 2022, global cloud spending is expected to grow 20% to $495 billion. But with global IT spending of more than $1 trillion a year, that still leaves room for the cloud industry to grow.
Amazon generated $18. 4 billion from its Internet segment in the first quarter, for an annual run rate of $73. 6 billion. Perhaps most importantly, its operating profit was $6. 5 billion. A dominant position in a highly beneficial and fast-growing company is a green flag, of course.
Similarly, Amazon’s ad profits grew 25% year-over-year in the first quarter, faster than the overall business. In the last 4 quarters reported, it generated $32. 6 billion in advertising revenue. To put this figure in context, about $114. 5 billion from Meta Platforms (FB 2. 32%) $118 billion in profit in 2021 came from advertising, and $211. 6 billion from Alphabet (GOOG 2. 21%) (GOOGL 2. 21%) $258 billion in advertising-based profits in 2021.
While Amazon may not challenge the two virtual advertising giants anytime soon for leadership in this space, it is gaining a significant percentage of the global online advertising market of $763 billion. Amazon has over two hundred million Prime members and marketers covet the opportunity to influence the purchasing decisions of this strong buyer base who are just a click away from the purchase. Meta and Alphabet would possibly have billions of active users on the platforms, but people’s buying activities largely take a position outside the ecosystems of those two companies.
A merchant who advertises on a Meta or Alphabet platform will have to take the user of those assets to their own website, where they will then have to convince the customer to buy. Compelling advertising in the right position on Amazon can generate an acquisition with much less effort. No wonder Amazon temporarily won the favor of marketers.
As Amazon’s e-commerce sales face headwinds as consumers return to their pre-pandemic grocery shopping habits, AWS and its advertising business will continue their long-term growth.
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