Amazon Ad Sales to Top AWS By 2021: Piper Jaffray

Amazon.com Inc.’s (AMZN) Amazon Web Services (AWS) business has been a huge driver of revenue growth, but that is expected to take a back seat to the amount of money it could make off of advertising in the next three years, if Piper Jaffray’s prediction proves true.

In a research report covered by CNBC, the Wall Street firm, which has an overweight rating on the e-commerce giant’s stock, wrote that while Wall Street is focused on its retail and AWS growth, new segments including its advertising business have been growing into a “massive” driver of current and future profits.

"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," wrote Michael Olson, an analyst at Piper Jaffray, reported CNBC. The analyst has a $2,100 price target on Amazon, which implies the stock could increase 10%. So far this year shares are up 58%. (See also: Amazon Ad Business Could Grow to $20B By 2020.)

AWS Has Long Dominated

For some time now, Amazon’s AWS unit has been dominating in the cloud market and has been seen as a key driver of growth even as rivals Microsoft Corp. (MSFT) and Alphabet’s (GOOGL) Google circle. The more revenue Amazon has in that area, the more investors and Wall Street reward it. When it comes to advertising, Google and Facebook Inc. (FB) have long dominated that front.

The e-commerce giant has been picking up its pace when it comes to landing advertising dollars as it aims to chip away at Facebook and Google’s dominance. Earlier in January, CNBC, citing unnamed sources, reported that Amazon has been holding talks with big consumer companies about running ads on its Alexa-powered Echo smart speakers. Some of the early talks are focused on whether or not companies would pay to be placed higher in searches on the Echo similar to what happens with Google search queries. (See also: America Has Become the United States of Amazon.)

Product Search Ad Market Share Increasing At Amazon

According to Olson, Amazon’s advertising business should hit $16 billion in 2021, which would be $1 billion higher than the $15 billion Olson estimates AWS will bring in. The analyst already thinks Amazon has more than 50% market share in product search while its other segment which includes its ad business increased sales 72% in the second quarter alone.

"Being the world's largest product search engine has its advantages and Amazon is starting to leverage them," wrote Olson. "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."