Amazon's Quiet Profit Driver: The Rise of Advertising
Amazon (NASDAQ: AMZN) is widely recognized for its e-commerce dominance and its highly profitable cloud computing division, Amazon Web Services (AWS). While AWS often takes center stage, a rapidly growing aspect of Amazon's business is quietly reshaping its profit engine: advertising.
The Advertising Flywheel: Prime Video, Retail Search, and DSP
Amazon's ad business is experiencing significant growth, fueled by several key components. Prime Video ads, retail search advertising, and Amazon's demand-side platform (DSP) create a unique flywheel effect, driving revenue and increasing profitability. This advertising revenue is becoming an increasingly important reason for long-term investment in Amazon.
The company's strength in advertising is derived from its unmatched access to customer data, its unique position to understand shopper intent, and the ever-expanding reach of its media properties.
Advertising Momentum: Q2 2025 Growth and CTV Expansion
Amazon's advertising services revenue surged 23% year-over-year to approximately $15.7 billion in the second quarter of 2025 (22% growth excluding currency impacts). This followed an 18% growth rate in Q1, demonstrating a healthy acceleration throughout the year. Key drivers include increased shopping activity, improved ad tools and measurement capabilities, the ongoing rollout of Prime Video ads, and the growth of connected-TV (CTV) partnerships.
A significant partnership is the June integration with Roku, reaching an estimated 80 million U.S. households. The company's expansion into CTV allows advertisers to extend their reach beyond retail search and tap into high-engagement streaming audiences, where they are willing to pay more for ad placements.
Why Advertising is Key to the Amazon Bull Case
Advertising represents a high-margin revenue stream layered on top of Amazon's vast retail and media ecosystem. While Amazon doesn't specifically report ad margins, the underlying economics are compelling and scale alongside traffic, selection, and relevance improvements.
As Amazon CFO Brian Olsavsky stated in the company's most recent earnings call, "Advertising remains an important contributor to profitability" in both North America and international segments.
Although AWS remains the largest profit center, generating $10.2 billion of operating income in the quarter, advertising is becoming an increasingly important contributor that diversifies and stabilizes the overall business.
Navigating the Risks: Cyclicality, Privacy, and Competition
While the outlook for Amazon's advertising business is positive, there are potential risks to consider. Advertising budgets can be cyclical, and privacy and regulatory changes can impact ad targeting and measurement. Competition from other large advertising platforms remains intense.
Despite these challenges, Amazon's unique capabilities in advertising, driven by its massive scale, are difficult for rivals to replicate. This suggests that Amazon is well-positioned to continue gaining market share in the advertising market for years to come.
The E-Commerce Catalyst: De Minimis Loophole Closure
Recent changes in customs law, specifically the closing of the "de minimis loophole," which allowed tariff exemptions on imported shipments valued at under $800, may also benefit Amazon. Competitors like Temu and Shein, which heavily relied on this loophole, are facing headwinds, while Amazon's robust U.S.-based warehouse and fulfillment network positions it favorably.
AI Integration and Long-Term Cost Savings
Amazon is also actively integrating generative AI technology into its e-commerce operations. While the immediate impact on margins is difficult to quantify, there are signs that automation efforts are proving effective in reducing operating costs. Analysts predict that Amazon's pivot toward next-generation fulfillment centers could result in substantial annual cost savings by 2030.
Investment Considerations: Staying Focused on the Long Term
While short-term factors, such as concerns about AWS growth, may influence investor sentiment, it's important to maintain a long-term perspective. The combination of a strong advertising business, favorable regulatory changes, and ongoing AI integration strengthens the case that Amazon can sustain double-digit top-line growth and rising profitability alongside AWS over time. Investors may also be persuaded to buy shares as they trade 10% off their all-time high.
