Amazon’s $51 Billion Secret Weapon Is Hiding in Plain Sight

In the 30 years since Amazon (AMZN -2.21%) was founded, it’s become one of the world’s most renowned companies. It’s one of the top three most recognized companies, according to financial services company IG Group, and was recently named one of the world’s most admired companies — for the eighth consecutive year — by Fortune 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 offered by AI, and cloud computing has long been Amazon’s most important breadwinner. However, investors might be surprised to learn that another area of the company’s business is generating the fastest growth.

Image source: Getty Images.

A host of opportunities

The aforementioned diversity of Amazon’s business gives the company plenty of avenues for growth. For example, Amazon’s e-commerce business grew by 7% during the preceding 12 months. The past couple of years have weighed on the online retail segment as inflation cut into consumer spending and shoppers traded down to lower-cost items.

Amazon Web Services (AWS), the company’s cloud infrastructure service, also suffered from a dearth of spending in recent years. The cloud segment grew 15% over the past year, as businesses have also been reticent to spend unnecessarily.

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

The Amazon advantage

Amazon’s e-commerce website is the foundation of the company’s online advertising opportunity, the result of its extremely valuable digital “real estate.” The company has a horde of data regarding the buying habits of its online customers.

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

Early this year, movies and television shows on Amazon Prime video began showing advertising 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 ad revenue this year, according to estimates provided by The Wall Street Journal.

Furthermore, 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 movie and television information catalog), and a number of Amazon’s electronic devices.

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

More to come?

The advent of generative AI will also play into Amazon’s digital advertising ambitions. The company has released a host of tools to assist 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 world’s third-largest digital advertiser, behind just Alphabet‘s Google and Meta Platforms. Yet given the significant opportunity, the stock is surprisingly affordable. At just 3x sales, Amazon represents a compelling opportunity for investors.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, and Meta Platforms. The Motley Fool has a disclosure policy.