According to Piper Jaffray, e-commerce giant Amazon’s advertising profits will do a lot better than the company’s cloud computing income by 2021.
The firm has reiterated an “overweight” rating on the company’s shares on the strength of Amazon’s ad business as a key component of the company’s future profitability.
According to Piper Jaffray, Amazon’s staggering growth in the internet advertising market will help its share’s increase.
“While the Street has been focusing on the trajectory of core retail, growth of AWS, and new categories such as grocery & pharma, Amazon’s advertising business has been quietly growing into a massive driver of current and future profitability,” said Analyst Michael Olson.
“By 2021, we believe it is likely that advertising operating income will exceed AWS. … Investors should be focused on Amazon advertising now; this is a major driver to results and valuation today and continuing in the coming quarters & years.”
According to Olson, Amazon’s ad business operating income will grow to $16 billion in 2021 versus $15 billion for Amazon Web Services that year. He also has forecast that Amazon already has product search market share “well above” 50 percent. He remarked on how the “Other” segment, where Amazon’s ad business resides, grew sales 72 percent in the second quarter.
“Being the world’s largest product search engine has its advantages and Amazon is starting to leverage them,” Olson said. “Advertising will be a driver to watch, as the retail industry continues to live or die by the shift to direct-to-consumer & digital channels and real estate on Amazon, more than any other digital company, may have a direct line of sight on the multi-billion dollar ‘trade promotion / merchandising’ budgets of many marketers.”
Olson has a $2,100 price target on the stock.
It was in July that Canaccord Genuity analyst Michael Graham raised his price target to $2,100 from $2,000, with a buy rating.
“While the valuation (of Amazon) is looking somewhat more stretched over the past few months, the fundamental momentum remains about as strong as it could be, with a better outlook for margins,” said Graham at the time.
Jefferies analyst Brent Thill also raised his Amazon price target recently to $2,185 from $1,950 with a buy rating.
“Every major segment of the business contributed to results and we see big tailwinds coming behind some of the most meaningful segments, including AWS, Prime, and the fast-growing advertising business,” Thill wrote.
Shares of Amazon have seen gains of over 60% this year.