Markets

COVID-19 Is Driving a Surge in E-Commerce Ad Spending

Investors already know that the coronavirus pandemic has been accelerating the adoption of e-commerce as consumers shop online from the safety of their homes. That's also causing a related surge in ad spending on e-commerce platforms, according to recent estimates from eMarketer. That's good news for e-commerce giant Amazon.com, which has already been growing its advertising business at breakneck speed in recent years.

Here's how much advertisers are expected to spend on e-commerce ads this year.

Amazon Prime delivery truck

Image source: Amazon.

Amazon will grab 76% of e-commerce ad spending this year

eMarketer estimates that ad spending on e-commerce platforms will jump 39% to reach $17.4 billion this year, which will represent approximately 12% of all digital ad spending in the U.S. Spending growth is accelerating due to the COVID-19 pandemic.

"Ecommerce channel ads are gaining popularity as brands realize the value of targeting prospects exhibiting purchase intent within the large e-commerce marketplaces," eMarketer Andrew Lipsman said in a release. "The trend has only accelerated during the pandemic as e-commerce accounts for a higher percentage of most brands' and retailers' sales."

Unsurprisingly, Amazon is expected to grab the vast majority of all that ad spending since it's the largest e-commerce platform in the world. Here's how other notable e-commerce tech companies are expected to fare this year, according to eMarketer.

Company

E-commerce Ad Revenue

Share

Amazon (NASDAQ: AMZN)

$13.2 billion

76%

Walmart (NYSE: WMT)

$849.4 million

5%

eBay (NASDAQ: EBAY)

$328.3 million

2%

Etsy (NASDAQ: ETSY)

$133.2 million

1%

Data source: eMarketer.

Advertising has been a key driver of profitability at Amazon, since that revenue has much higher margins than the core e-commerce business. Amazon's e-commerce segment in North America has an operating margin of just 3.4%. "Advertising and [Amazon Web Services] were certainly a strong component of gross margin increases," CFO Brian Olsavsky noted on the last earnings call.

Amazon's "Other" segment primarily consists of advertising revenue, as well as some other services. Other revenue has totaled $16.5 billion over the past four quarters.

eMarketer expects Amazon to further expand its dominance of e-commerce ad spending, forecasting that the company will grab 77% of the entire market by 2022. Walmart has been investing heavily in growing its e-commerce business, including the recent introduction of Walmart+, a membership program that's loosely modeled after Amazon Prime. Walmart's e-commerce sales nearly doubled last quarter, and the retail juggernaut recently eclipsed eBay in e-commerce sales for the first time.

Etsy is also enjoying a massive influx of customers, with active buyers jumping 41% last quarter and revenue skyrocketing by 137%.

"As advertisers look to a future where it's harder to identify and track users, e-commerce properties have the advantages of shopping and intent data on the targeting side plus closed-loop attribution for measurement and optimization," eMarketer analyst Nicole Perrin noted.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Etsy. The Motley Fool recommends eBay and recommends the following options: long January 2021 $18 calls on eBay, short January 2021 $37 calls on eBay, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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