Amazon's ad revenue rises 34%, but growth slows

Brief:

Amazon reported revenue for its "other" category that mostly comes from ad sales rose 34% to $2.72 billion during the period, compared with a 96% yearly jump in the prior quarter, per an announcement.
Overall, the company reported a fourth straight quarter of record profit as the e-commerce giant’s revenue rose 17% from a year earlier to $59.7 billion in the first quarter.
Amazon’s push into physical retail — including its cashier-less Amazon Go stores, bookstores and the Whole Foods grocery chain acquired in 2017 — showed meager growth of 1% to $4.31 billion from a year earlier. Amazon said its Alexa virtual assistant, which powers its Echo smart speakers, has 90,000 skills, as apps for the voice-enabled platform are called, up from 80,000 three months earlier.

Insight:

The sudden deceleration in Amazon's ad growth — after growing at least 60% in the past five quarters, as noted by CNBC — was bound to happen as the business matured past its heady startup days. Amazon is still the third-biggest digital ad platform behind Google and Facebook. The company’s 34% ad growth to about $2.72 billion also is respectable, besting Facebook’s 26% gain to $11.8 billion and Twitter’s 18% expansion to $679 million. Snap reported a 39% jump to $320.4 million, and Google parent Alphabet will report results on Monday.

However, Amazon's results may compel analysts to scale back their estimates for its ad growth. Researcher eMarketer in February forecast that Amazon’s ad business would grow 50% this year to about $11.4 billion, or about 8.8% of the U.S. digital ad market. That compares with a 37.2% share for Google and 22% for Facebook, per the researcher.

Amazon continues to expand its advertising offerings, which could help it continue to attract more ad dollars and accelerate growth. A recent report that video ads will be coming to the e-commerce giant's shopping app could be a boon as mobile advertising continues to grow and offer marketers an alternative to Facebook, where in-feed video ads are popular.

In addition to no-fee delivery, Amazon Prime offers access to a library of 2 million streamed songs and its over-the-top (OTT) video service, Amazon Prime Video, that competes with Netflix and Hulu. Amazon this month introduced a free, ad-supported music service to owners of Echo speakers that will bolster its ad sales, while positioning the company to compete more directly with Spotify. While Amazon doesn't disclose its paid subscriber numbers, eMarketer estimated that Amazon Music will be the fastest-growing music streaming service by the end of this year. Likewise, Amazon doesn't disclose sales of Echo devices, but analysts have estimated that the company dominates the market for smart speakers with a 70% market share.

Amazon's profit hit records in recent quarters as the company eased back on investments in distribution and logistics. That will change as the company plows an estimated $800 million in Q2 2019 into upgrading its systems to handle one-day delivery for its 100 million Prime members. The move will help the company compete against retailers that are adding delivery service and boost the value of a Prime subscription. Walmart, Target and Home Depot are among the retailers that are expanding online ordering and delivery services. Walmart this month opened grocery ordering to Google Assistant, the search giant's rival voice platform to Amazon Alexa, and added kids clothing delivery through a partnership with Kidbox. Target’s same-day delivery company Shipt this month added service from Petco pet stores and pharmacy chain CVS Health.