Markets

A New Frontier Will Be Positive for Amazon Stock

A recent report by Bloomberg that Amazon (NASDAQ: ) is experimenting with video ads on iOS.  Amazon’s latest push improves the ability of the company to grab a greater share of digital advertising from the duopoly of Facebook (NASDAQ: ) and Alphabet, (NASDAQ: ), potentially boosting Amazon stock in the process.

Amazon stock AMZN Stock
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According to the latest eMarketer report, Amazon’s share of the digital-ad market was 8.8% while Facebook’s stood at 22.1% and Google led with 37.2%. Facebook is working to with an in-app purchasing option. Although Amazon’s user-engagement levels are meaningfully lower than those of Facebook and Google, AMZN has a number of levers it can use to expand its foothold in digital advertising.

Video Ads Are the New Frontier for Amazon Stock

Until now, AMZN has focused on static display ads and a few brand ads to drive its advertising sales. Its management has reiterated several times that its main objective is to prevent any disruption of customers’ experience. This slow-and-steady approach has prevented some of the issues which have hurt Facebook and Google.

Amazon’s platform is also “cleaner” than those of FB and GOOG, which is reassuring for brands and will be positive for Amazon stock over the longer term. By advertising on AMZN, brands ensure that their  advertising will not be next to content which hurts their image.

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The mobile-video-advertising market is expected to grow from $16 billion in 2019 to $24 billion by 2022. The growth of video advertising will provide Amazon with a good tool to counter Facebook’s initiative in social commerce.

Recently, FB has started allowing Instagram users to make purchases while they’re still on the app. This means that customers can buy items on Instagram without being redirected to merchants’ websites. 

Interactive Shopping

Mobile-video advertising will allow Amazon to incorporate more interactive shopping into its website, while enabling brands to display their goods with greater precision.

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In the past twelve months, Amazon’s Other businesses, (a category that’s dominated by advertising) has generated revenue of close to $10 billion. The growth rate of this segment is still very high, and advertising carries very high margins.

As a result, as AMZN’s ad revenue increases, the operating income of Amazon will rise and the bullish case on Amazon stock will become stronger.

Moreover, as Amazon’s ad revenue rises, the ability of the company to invest in future growth engines will increase. For example, AMZN could invest more in its streaming business, whose competition is increasing. 

Intention to Buy

The biggest advantage which advertisers have on Amazon is the high intention to buy of its users. When consumers use Facebook or Google, their primary motivation is not shopping. However, on Amazon, all the users are interested in making purchases or price comparisons. According to a almost half of alll product searches originate on Amazon.

Video ads will also help advertisers more effectively market their brands  Mobile-video ads give bigger brands like General Motors (NYSE:) a good way to target a particular income group. Specifically, companies like GM can place their video ads in front of shoppers who tend to make more expensive purchases on Amazon. Marketers can more effectively target consumers on Amazon than on Facebook or Google because of the large amount of data that AMZN has about consumers’ final purchases. At the same time, Amazon’s very careful approach to advertising has prevented any big privacy concerns surrounding its platform from surfacing.

The Impact on Amazon Stock

The increases of Amazon’s operating margins over the last few quarters has caused analysts’  forward earnings per share estimates for AMZN to rise.

In the last year, Amazon’s EPS estimates for two fiscal years into the future has increased remarkably. This shows that most analysts think that AMZN’s margins and EPS can continue to rise.

Currently, Amazon stock is trading close to 30 times analysts’ average EPS estimates for two fiscal years from now. That makes AMZN stock a bit expensive for a company whose revenue growth is showing signs of slowing. But Amazon has a number of levers it can use to kick-start its revenue growth, .

Meanwhile, its mobile-video advertising project and other ad initiatives should allow the company to raise its margins. Amazon is unique because it combines a massive e-commerce platform with digital advertising. That combination will make investors more bullish towards Amazon stock.

The Bottom Line on Amazon Stock

AMZN is adding new advertising options to its shopping platform. It is conducting beta testing of mobile video advertising on iOS. Later this year, AMZN will also launch video ads  on Android devices. Mobile video advertising will become a $24 billion market by 2022. AMZN can corner a decent chunk of this market due to the advantages offered by its shopping platform to advertisers.

The biggest story driving Amazon stock for the next two to three years will be the growth of its advertising segment. It is a good bet that Amazon’s revenue from digital advertising and its share of the market will rise in the near-term, helping to improve sentiment towards Amazon stock.

As of this writing, Rohit Chhatwal held no positions in the aforementioned securities.

The post appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.