4 ms·

Amazon is the third largest advertising company after Google and Meta. Its ad revenue is $32B (and growing fast, the run rate is $40B). That is half the revenue

by fmajid 4y ago

Amazon is the third largest advertising company after Google and Meta. Its ad revenue is $32B (and growing fast, the run rate is $40B). That is half the revenue of AWS, which is worth 70% of Amazon's market cap. The inescapable conclusion is that Amazon's advertising is worth the remaining 30% of Amazon's market cap and Amazon's e-commerce arm is deemed worthless by Wall Street, its only purpose being to support the advertising business, just what Google Search is to Alphabet. Think on that for a moment. The other inescapable conclusion is that whenever the quality of the shopping experience on Amazon and the needs of Amazon's advertising business clash, advertising will win (just as it has on Google). That's an even more foregone conclusion since Andy Jassy took on the top job, he's from AWS and owes no special allegiance to the historical e-commerce business.

deleted 4y ago
[deleted]
SergeAx 4y ago
> AWS [...] worth 70% of Amazon's market cap I am curious, how did you figure out this 70% number? Why not 60%, not 80%?
s17n 4y ago
> The other inescapable conclusion is that whenever the quality of the shopping experience on Amazon and the needs of Amazon's advertising business clash, advertising will win (just as it has on Google). Saying that the e-commerce arm is worthless isn't really the right way to think about it - the ads business only exists to due the e-commerce product. Both Amazon and Google are well aware that their ad revenues depend on their having users, who will ultimately leave if the product (ecommerce and search, respectively) isn't compelling. Both of them know that long-term success requires them to prioritize user experience. Do they make bad decisions, either due to misaligned incentives internally or due to simply making mistakes? Undoubtedly. But it's also worth considering that they probably get the tradeoff right a lot of the time and most people simply aren't bothered by ads nearly as much as you'd like them to be.
- Thursday24 4y ago
  Excellent perspective. Organisations are similar to individual human minds in structure, but scaled. They will make mistakes, just like people do, but also correct themselves over the long haul so that they can survive.
- deleted 4y ago
  [deleted]
- fmajid 4y ago
  Obviously Amazon's e-commerce division is not worthless, but it often happens that conglomerates are worth less than the sum of their parts. Many activist investors have been calling to split AWS from Amazon.com, but the ad business can't be split from the store that brings it eyeballs.
  - repsilat 4y ago
    > less than the sum of their parts At least with e-commerce and advertising it's clear they're worth more together. Without advertising the profits would be thin, and without e-commerce the advertising couldn't exist.
- robocat 4y ago
  Hard to know what fmajid means - although mentioning revenue is a serious black flag. Google’s search is a cost-centre and their advertising is a profit-centre. You could say Amazon is similar because in 2021 AWS made all the income and e-commerce made zero income[1]. I would be interested to see an analysis of income per business sector*, including their advertising sector, for Amazon. fmajid would need that information to be able to make the conclusions they drew. From article: “After selling $31 billion in ads last year, Amazon became the third-largest online ad company in the United States” Hard to know what this means, since we can’t know how much it “cost” Amazon for those ads (especially the cost of consumer dissatisfaction as the article mentions, and what is opportunity-cost?) * and ideally assets per sector as well, plus a metric for internal capital reinvestment (VC style). [1] https://www.investopedia.com/how-amazon-makes-money-4587523 https://www.investopedia.com/how-amazon-makes-money-4587523 Amazon unfortunately seems to only report on their segments: North America, International, and AWS.
Archipelagia 4y ago
Sorry, but can you share some source for that? Like, on first page I've found in Google (https://www.insiderintelligence.com/insights/amazon-revenue/ https://www.insiderintelligence.com/insights/amazon-revenue/) it says: AWS – ~17B Ads – ~9B Online stores – ~66B I actually wouldn't be surprised if I'm misunderstanding something and you're right, but can I ask where you got these numbers? Edit: On second read I realized the source I sent was misleading – the title talks about annual revenue, but hidden in the text there's a note saying that sub-headings actually show quarterly revenue. I'm still not sure about AWS-to-sales ratio, but my apologies for earlier confusion.
- arcturus17 4y ago
  Yea no I'm also left scratching my head. I've never heard of a methodology to attribute market cap portions to business units; eager to hear some clarification too.
  - throwaway5752 4y ago
    It is a well-established concept called https://www.investopedia.com/terms/s/sumofpartsvaluation.asp https://www.investopedia.com/terms/s/sumofpartsvaluation.asp. A company's value is estimated on net present value (npv) of its projected, discounted future cash flows. If a company has a large, stable subsidiary that is growing slowly but is cash flow positive and a very fast growing but money losing subsidiary, it makes more sense to value parent company as if both subsidiaries were separate companies than the average of the two. A famous example was AWS within Amazon before it became noticeable in the bottom and top lines.
    - texasbigdata 4y ago
      Further, it’s often applied backwards. Some financial engineering self proclaimed wizard will claim “x+y+z=a and the stock is trading at b, and a>>b, therefore the conglomerate discount is too large so we can earn risk free profit (aka arbitrage) by breaking this company up and publicly listing x,y, and z as independent units”. See: Xerox, for example. Typically in mergers, you see accretion due to the removal of duplicate functions on the cost side (you don’t need two HR departments for example), but sometimes you get negative credit if you’re a too big / too opaque / too confusing.
manmal 4y ago
What rationale is behind comparing revenue with market cap? I thought price is rather judged against earnings, eg by looking at the P/E ratio.
- s1artibartfast 4y ago
  Market cap is based on p2e. Profit can be subdivided into different revenue streams for a company
m463 4y ago
Similar to how vizio makes more money spying through their tvs than selling them in the first place.
- squarefoot 4y ago
  Context: https://www.howtogeek.com/767919/tv-manufacturers-make-more-from-ads-than-selling-tvs/ https://www.howtogeek.com/767919/tv-manufacturers-make-more-...
greatpostman 4y ago
It’s an accounting trick. Retail is profitable via ads and more. Retail also pays huge infrastructure sums to aws. It’s all a trick to make amazon stock pump
- subradios 4y ago
  Not merely accounting. Cultural as well, it forces the e-commerce coders to take infra cost seriously and alleviates cost center toxicity from infra teams.
zwkrt 4y ago
This reminds me that as far as wall street is concerned, it is actually an afterthought that airlines operate airplanes, all the money is in the credit cards.
- fmajid 4y ago
  I think it was the CEO of American Airlines, which owned the Sabre computer reservation system at the time, that if he had to choose between keeping the airline or the CRS, he'd go for the latter. In any event. Sabre was spun out in 2000.
- blamazon 4y ago
  Making and selling TVs is similarly an afterthought for TV manufacturers now that smart TVs have been commodified, the money is in the analytics platforms.
oliwary 4y ago
The same can be said for airlines, which are often worth less in total than their loyalty programs: https://thehustle.co/10052020-airline-loyalty-programs/ https://thehustle.co/10052020-airline-loyalty-programs/ Of course, these loyalty programs would be worthless without the airline itself as rewards.

by fmajid 4y ago

deleted 4y ago

[deleted]

SergeAx 4y ago

> AWS [...] worth 70% of Amazon's market cap I am curious, how did you figure out this 70% number? Why not 60%, not 80%?

s17n 4y ago

> The other inescapable conclusion is that whenever the quality of the shopping experience on Amazon and the needs of Amazon's advertising business clash, advertising will win (just as it has on Google). Saying that the e-commerce arm is worthless isn't really the right way to think about it - the ads business only exists to due the e-commerce product. Both Amazon and Google are well aware that their ad revenues depend on their having users, who will ultimately leave if the product (ecommerce and search, respectively) isn't compelling. Both of them know that long-term success requires them to prioritize user experience. Do they make bad decisions, either due to misaligned incentives internally or due to simply making mistakes? Undoubtedly. But it's also worth considering that they probably get the tradeoff right a lot of the time and most people simply aren't bothered by ads nearly as much as you'd like them to be.

Thursday24 4y ago
Excellent perspective. Organisations are similar to individual human minds in structure, but scaled. They will make mistakes, just like people do, but also correct themselves over the long haul so that they can survive.
deleted 4y ago
[deleted]
fmajid 4y ago
Obviously Amazon's e-commerce division is not worthless, but it often happens that conglomerates are worth less than the sum of their parts. Many activist investors have been calling to split AWS from Amazon.com, but the ad business can't be split from the store that brings it eyeballs.
- repsilat 4y ago
  > less than the sum of their parts At least with e-commerce and advertising it's clear they're worth more together. Without advertising the profits would be thin, and without e-commerce the advertising couldn't exist.
robocat 4y ago
Hard to know what fmajid means - although mentioning revenue is a serious black flag. Google’s search is a cost-centre and their advertising is a profit-centre. You could say Amazon is similar because in 2021 AWS made all the income and e-commerce made zero income[1]. I would be interested to see an analysis of income per business sector*, including their advertising sector, for Amazon. fmajid would need that information to be able to make the conclusions they drew. From article: “After selling $31 billion in ads last year, Amazon became the third-largest online ad company in the United States” Hard to know what this means, since we can’t know how much it “cost” Amazon for those ads (especially the cost of consumer dissatisfaction as the article mentions, and what is opportunity-cost?) * and ideally assets per sector as well, plus a metric for internal capital reinvestment (VC style). [1] https://www.investopedia.com/how-amazon-makes-money-4587523 https://www.investopedia.com/how-amazon-makes-money-4587523 Amazon unfortunately seems to only report on their segments: North America, International, and AWS.

Archipelagia 4y ago

Sorry, but can you share some source for that? Like, on first page I've found in Google (https://www.insiderintelligence.com/insights/amazon-revenue/ https://www.insiderintelligence.com/insights/amazon-revenue/) it says: AWS – ~17B Ads – ~9B Online stores – ~66B I actually wouldn't be surprised if I'm misunderstanding something and you're right, but can I ask where you got these numbers? Edit: On second read I realized the source I sent was misleading – the title talks about annual revenue, but hidden in the text there's a note saying that sub-headings actually show quarterly revenue. I'm still not sure about AWS-to-sales ratio, but my apologies for earlier confusion.

arcturus17 4y ago
Yea no I'm also left scratching my head. I've never heard of a methodology to attribute market cap portions to business units; eager to hear some clarification too.
- throwaway5752 4y ago
  It is a well-established concept called https://www.investopedia.com/terms/s/sumofpartsvaluation.asp https://www.investopedia.com/terms/s/sumofpartsvaluation.asp. A company's value is estimated on net present value (npv) of its projected, discounted future cash flows. If a company has a large, stable subsidiary that is growing slowly but is cash flow positive and a very fast growing but money losing subsidiary, it makes more sense to value parent company as if both subsidiaries were separate companies than the average of the two. A famous example was AWS within Amazon before it became noticeable in the bottom and top lines.
  - texasbigdata 4y ago
    Further, it’s often applied backwards. Some financial engineering self proclaimed wizard will claim “x+y+z=a and the stock is trading at b, and a>>b, therefore the conglomerate discount is too large so we can earn risk free profit (aka arbitrage) by breaking this company up and publicly listing x,y, and z as independent units”. See: Xerox, for example. Typically in mergers, you see accretion due to the removal of duplicate functions on the cost side (you don’t need two HR departments for example), but sometimes you get negative credit if you’re a too big / too opaque / too confusing.

manmal 4y ago

What rationale is behind comparing revenue with market cap? I thought price is rather judged against earnings, eg by looking at the P/E ratio.

s1artibartfast 4y ago
Market cap is based on p2e. Profit can be subdivided into different revenue streams for a company

m463 4y ago

Similar to how vizio makes more money spying through their tvs than selling them in the first place.

squarefoot 4y ago
Context: https://www.howtogeek.com/767919/tv-manufacturers-make-more-from-ads-than-selling-tvs/ https://www.howtogeek.com/767919/tv-manufacturers-make-more-...

greatpostman 4y ago

It’s an accounting trick. Retail is profitable via ads and more. Retail also pays huge infrastructure sums to aws. It’s all a trick to make amazon stock pump

subradios 4y ago
Not merely accounting. Cultural as well, it forces the e-commerce coders to take infra cost seriously and alleviates cost center toxicity from infra teams.

zwkrt 4y ago

This reminds me that as far as wall street is concerned, it is actually an afterthought that airlines operate airplanes, all the money is in the credit cards.

fmajid 4y ago
I think it was the CEO of American Airlines, which owned the Sabre computer reservation system at the time, that if he had to choose between keeping the airline or the CRS, he'd go for the latter. In any event. Sabre was spun out in 2000.
blamazon 4y ago
Making and selling TVs is similarly an afterthought for TV manufacturers now that smart TVs have been commodified, the money is in the analytics platforms.

oliwary 4y ago

The same can be said for airlines, which are often worth less in total than their loyalty programs: https://thehustle.co/10052020-airline-loyalty-programs/ https://thehustle.co/10052020-airline-loyalty-programs/ Of course, these loyalty programs would be worthless without the airline itself as rewards.