Did Amazon Just Say “Checkmate” to Alphabet?

When you think of Amazon (AMZN 0.69%), I’d wager that your first thought is of its e-commerce storefront. However, the company has many other businesses connected throughout its ecosystem, and its fastest-growing source of revenue during the past year has been its advertising platform.

Moreover, the company appears to be doubling down on its advertising efforts following major partnership deals with social media platform TikTok and photo-sharing application Pinterest.

Amazon looks poised to become a disrupter among social media platforms, and in my view, this could be a big problem for Alphabet (GOOG -0.79%) (GOOGL -0.80%).

Breaking down Amazon’s deals with TikTok and Pinterest

Have you ever been greeted by an advertisement while scrolling on social media, but after clicking on it, you were subsequently rerouted to a totally different webpage?

This dynamic is quite common at the intersection of social media and e-commerce, and it can make or break a user’s experience while using an app. Given that social media platforms are hyperfocused on engagement, bridging the gap between in-app experiences and monetizing users is a big priority — and Amazon may have just found a great solution.

Amazon’s partnerships with TikTok and Pinterest aren’t really new. However, the latest development in its relationships with these platforms looks like a game changer.

Now, users viewing videos or pictures on TikTok and Pinterest can purchase related items from Amazon without going to its website. In other words, they can shop natively within the social media apps. Of note, Amazon already has this feature integrated with Snap as well.

On the surface, the benefit here is that it makes the user experience much more seamless and convenient. However, I see this as a big counter to Alphabet’s dominant advertising platform that could provide lucrative long-term tailwinds for Amazon.

Amazon to let TikTok users shop directly within the app.#AMZN #TikTok #AMZNStock #AmazonStock #AmazonTikTok #TikTokAmazon #Amazon #AmazonShopping #AmazonAds$AMZN pic.twitter.com/rZwnxl11K7

— WealthWise (@WealthWise_dca) August 9, 2024

Why is this a big blow to Alphabet?

Alphabet owns both Internet search giant Google and video-sharing platform YouTube, which are consistently ranked as the top two most visited websites around the world, attracting north of 100 billion monthly visits.

Given its online footprint, it’s not entirely surprising that Alphabet’s main source of revenue is advertising. However, Alphabet’s advertising revenue has been under pressure for some time now.

Data source: Alphabet. YoY = year over year.

The figures above require a close examination. During the first half of 2023, Google advertising was essentially plateauing. However, Alphabet appears to have turned things around and during the past several quarters, ad sales have accelerated. Even so, I don’t think Alphabet should be thought of as the de facto solution when it comes to fetching marketing dollars anymore.

Google Search is undoubtedly facing noteworthy competition for the first time in decades, largely due to the introduction of large language models (LLM) such as ChatGPT and Claude. Moreover, YouTube faces staunch competition from Meta’s Instagram, as well as TikTok, Pinterest, and Snap — all of which are aligning with Amazon.

Image Source: Getty Images.

Amazon’s checkmate move

While Alphabet has proven that it can monetize users on its platform via advertising, I question whether the company can really go much deeper. For instance, if a person searches for a product on Google and subsequently makes a purchase, I’m skeptical about Alphabet’s ability to further capitalize on that interaction via cross-selling.

By contrast, I think this dynamic is precisely what Amazon is going for by leveraging social media. Social media platforms are more heavily used by younger demographics, and it is these cohorts that tend to prefer online shopping over brick-and-mortar retail.

TikTok, Snap, and Pinterest now serve as sources of lead generation for Amazon, bringing the company younger shoppers who frequently use e-commerce. In theory, this can help Amazon build deeper brand loyalty with new shoppers and become their default online storefront. Over time, the real win would be if these shoppers became subscribers to Amazon Prime.

If Amazon can bolster its Prime membership base through its partnerships with social media incumbents, not only will it generate more advertising revenue, it will also foster a tailwind for e-commerce sales.

So while Alphabet remains the leader in Internet search and video sharing, rising competition and alliances between other big tech players could spell a major problem for it down the road. Conversely, Amazon is positioning itself to benefit by monetizing social media users in more ways than one.

In my view, Amazon just took a major step toward potentially dethroning Alphabet as the Internet’s advertising king. Investors should keep a close eye on Amazon’s revenue acceleration and margin expansion as its relationships with social media platforms continue to develop.

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. Adam Spatacco has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Etsy, Meta Platforms, and Pinterest. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.