piranka
Amazon.com, Inc.’s (NASDAQ:AMZN) growing advertising unit is widely followed, as it is one of the chief beneficiaries of purchase-minded web visitors, while the broader digital advertising industry continues to reel from the deterioration of third-party cookies. Amazon’s stellar advertising revenue growth comes at the expense of rising advertising costs for sellers amid intensifying competition, resulting in the dilution of Return on Ads Spend (RoAS). Amazon has recently launched Amazon Marketing Stream (Beta), which is a cloud-powered solution that ultimately strives to improve conversion rates and RoAS for its sellers. While initial Beta results reflect success, its value upon widespread rollout is likely to be a mixed bag over time.
According to a 2021 study by JungleScout, 59% of Amazon sellers are concerned about rising advertising costs which subdue Return on Ad Spend (RoAS). Hence, Amazon’s advertising unit could become a victim of its own success, whereby its rising popularity continues to make it increasingly competitive, driving bids for Cost-Per-Click [CPC] higher, forcing sellers to frequently expand their advertising budgets, and consequently diluting RoAS. This could discourage sellers from using Amazon’s advertising solutions, or from selling on the Amazon marketplace altogether, in favour of other ecommerce channels like Shopify (SHOP).
Amazon Marketing Stream
In the interest of maintaining the allure of Amazon’s advertising solutions, earlier this year Amazon revealed Amazon Marketing Stream (Beta), a cloud-powered advertising solution to enhance the agility of marketing campaigns. Amazon’s Q2 Earnings release proclaimed Amazon Marketing Stream as:
“A product that automatically delivers hourly Sponsored Products campaign metrics to advertisers or agencies through the Amazon Ads API. The Stream provides near real- time performance insights to enable more effective campaign optimization, more agility in responding to campaign changes, and increased operational efficiency to help drive business growth for advertisers.”
This advertising solution essentially leverages Amazon’s industry-leading cloud technology to enhance advertisers’ ability to drive conversion rates and RoAS higher. With the introduction of Amazon Marketing Stream, Amazon is enabling advertisers to adjust marketing campaigns based on real-time performance changes, essentially empowering them to augment RoAS in an agile manner.
According to Quartile CEO, Daniel Knijnik, one of the Beta participants of the Amazon Marketing Stream:
Amazon Marketing Stream has helped us to understand how conversion rates for specific products and sub categories fluctuate by time of day, allowing us to increase bids and budget by hour of day to match trends in signals such as purchase conversion rates. By utilizing Amazon Marketing Stream to inform our hourly bidding adjustments, we’ve seen an average increase in conversion rate of 15%, and a reduction in ACOS [Advertising Cost of Sales] of 10% across our customer base.
Early signs of success among users of Amazon Marketing Stream will likely lead to more widespread adoption across Amazon’s merchant base when the solution is rolled out more broadly, following its Beta (testing) phase. The fact that it is powered by AWS enhances Amazon’s ability to scale the advertising solution as it becomes more widely utilized, and allows for effective cost management as it is in full control of the value chain for this solution (as with all Amazon services), as opposed to being reliant on a third-party provider. This also helps widen its moat against other advertising platforms that are unable to offer similar in-house cloud-driven advertising solutions.
On a side note, Meta Platforms (META) (aka Facebook, a key advertising competitor) relies on AWS to power its social media platforms. Given that Amazon and Meta are now advertising rivals, this could undermine Meta’s ability to offer similar cloud-driven advertising solutions through AWS, or at least not at the same cost efficiencies as Amazon.
Furthermore, the new advertising solution also encompasses a strategy to eventually upsell towards AWS solutions as sellers become larger and increasingly successful. In order to enable Amazon Marketing Stream, sellers must have an AWS account, thereby encouraging sellers to become AWS subscribers to be able to benefit from Amazon’s advanced advertising tools. Moreover, by deeply integrating advertising metrics into sellers’ core marketing operations through AWS, it opens the door for selling other AWS functionalities as these sellers seek to expand their operations. Hence, Amazon Marketing Stream not only offers an avenue to boost advertising revenue, but also to augment AWS subscription revenue overtime.
Amazon Marketing Stream offers to bolster Amazon’s ability to attract new advertisers, or even new sellers to the platform, as the ability to efficiently offer increasingly granular, real-time performance metrics for marketing campaigns could prove to be an essential customer acquisition factor in the advertising industry, as advertisers seek to constantly better their understanding of online shopping trends. It is a valuable tool for sellers to better understand how to optimize marketing success, and may make Amazon’s advertising solutions stickier among sellers that are willing to spend more advertising dollars to win more business on the Amazon marketplace.
However, while the initial responses from the “Beta” group are positive, proclaiming higher conversion rates and lower ACOS, these benefits are unlikely to prove sustainable as the solution is rolled out to all sellers. The eventual widespread adoption of the Amazon Marketing Stream will lead to more competitive bidding wars, driving up CPC during popular shopping hours induced by signals from the hourly performance metrics delivered to all advertisers. Hence, while initial results reflect rising conversion rates and RoAS based on a sample of sellers testing out the new advertising solution, it may not end up resolving sellers’ concerns around rising advertising costs following a broader roll-out, as RoAS is likely to become diluted overtime amid intensifying CPC bidding wars.
Despite Amazon’s above- average growth rates for its advertising unit relative to the rest of the digital advertising industry, rising advertising costs remains a concern, and could slow down advertising revenue growth going forward, as advertisers seek cheaper marketing alternatives. For context, according to a 2021 study, only 32% of Amazon sellers planned to spend more advertising dollars in 2022, and keep in mind that this is before the ripple effects from the Russia-Ukraine war, the persistently higher inflation this year, and the growing fears of a recession on the horizon amid a stubbornly hawkish Fed. Hence, amid the bearish developments this year, Amazon is unlikely to be immune to an industry-wide advertising slowdown despite the prowess of its advertising solutions.
Despite Amazon’s above-average growth rates for its advertising unit relative to the rest of the digital advertising industry, rising advertising costs remains a concern, and could slow down advertising revenue growth going forward, as advertisers seek cheaper marketing alternatives. For context, according to a 2021 study, only 32% of Amazon sellers planned to spend more advertising dollars in 2022, and keep in mind that this is before the ripple effects from the Russia-Ukraine war, the persistently higher inflation this year, and the growing fears of a recession on the horizon amid a stubbornly hawkish Fed. Hence, amid the bearish developments this year, Amazon is unlikely to be immune to an industry-wide advertising slowdown despite the prowess of its advertising solutions.
The likely materialization of a recession in 2023 will not only impede growth in advertising, but also its core e-commerce business. Amazon currently trades at a Forward P/E (GAAP) ratio of around 6,529.51x, compared to a 5Y average of 272.45x, and a sector average of 13.05x. The stock is substantially overvalued, even compared to its own historically expensive Forward P/E multiple, hence moderating bullish elements of the stock and inducing a “Hold” rating, as investors face the risk of both earnings declines and contractions in valuation multiples amid the bearish macro backdrop.
Summary
Amazon Marketing Stream offers more value to sellers to help optimize business success, and could help enhance Amazon’s edge over other advertising platforms. On the one hand, it could make advertising solutions (and the broader platform) stickier for larger merchants with deeper pockets who are willing to increase ad spend to take advantage of popular shopping hours. On the other hand, it is unlikely to resolve the issue of rising advertising costs, hence does little to retain smaller merchants who seek to escape intensifying competition.
Amazon will need to continue to innovate to deliver more cost-effective advertising solutions with more sustainable RoAS, in order to dissuade merchants from exploring alternative advertising channels (or other ecommerce platforms altogether) and effectively fend off advertising competition going forward. While Amazon’s continuous innovations to advance its platform offerings bolster its competitive positioning to drive future growth, it is not advisable to buy the stock at these overvalued levels.
Be the first to comment