Amazon's highly profitable ad division is the key to funding the company's future growth, according to a Needham analyst.
Amazon.com Inc. is renowned for its retail and cloud-computing divisions, but what about its advertising business?
At less than 10% of Amazon.com's total sales, ads are often overlooked by investors - a big mistake, according to Needham analyst Laura Martin, who called Amazon's ad business its "crown jewel" in a note Thursday.
The worst performer this year among the group of megacap tech stocks known as the Magnificent Seven, Amazon's stock has gained a paltry 0.5% in 2025. But Amazon bears are missing the big picture, as Martin believes the ad business will be a more important source of upside than Amazon Web Services or e-commerce in the near term.
Martin pointed out that Amazon's advertising business has been booking a 20% year-over-year growth rate since 2019, twice the growth rate for the company's overall sales. The fast pace of expansion has made Amazon's ad business the third largest in the world, right after Alphabet Inc.'s Google and Meta Platforms. It's an impressive feat, especially considering that Amazon launched its ad business in 2019, while Google and Meta both have over two decades of experience in advertising.
Building a powerful advertising business is increasingly critical for Big Tech companies, as ads tend to have the highest profit margins out of any revenue stream, according to Martin. As these companies ramp up their artificial-intelligence capital expenditures, they can offset some of their cash burn with their ad segments.
Quarter after quarter, Amazon's ad business has always recorded the highest operating margins across the whole company, according to Needham. Martin's analysis shows that Amazon ads are twice as profitable as AWS, with roughly 70% operating margins. Additionally, Amazon's ad business contributes over 50% of the company's total operating income.
A key part of Amazon's success in ads is its ability to integrate the retail business's proprietary first-party shopping data into ad buying. With the majority of U.S. consumers beginning product searches on Amazon, the company is able to target ads at high-intent shoppers at the moment of purchase. Amazon's extensive data on users' past activity also gives it an advantage when it comes to ad targeting.
These features help Amazon convert "browsing into transactions at a much higher rate than Meta or Google Search," Martin wrote.
AWS will be the key to long-term growth for Amazon, but building out cloud-computing capacity is a costly endeavor that won't immediately pay off. According to Needham estimates, AWS is responsible for over 80% of Amazon's $100 billion estimated 2025 capex, has significantly lower margins than ad revenues and faces fierce global competition.
"None of these negatives are true for the [advertising] business," Martin said, making it a critical part of Amazon's overall strategy going forward.
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