Unlike Google and Facebook, Amazon’s advertising revenue comes primarily from network partners, not owned and operated media, so it can dial up ads based on how it prioritizes profit and sales volume. For instance, if Amazon suddenly decided to give a higher percent of each transaction to ad partners, its ad network and overall sales could light up while profitability remained unchanged.
Advertising is the lifeblood of Google or Facebook, but for Amazon, advertising is just one of many lines of business, so Amazon has the luxury of getting its profits from other areas if it chooses to. Consequently, Amazon defies standard investment modeling.
Wieser said there’s a high degree of guesswork in forecasting ad revenue and modeling a business like Amazon.
“My understanding from speaking with people in the industry is that Amazon’s retail, subscription-based and advertising revenues are fairly fluid,” he said. “Amazon will optimize revenue streams and profitability based on what it sees from consumers.”
Pivotal isn’t the only investment firm that has recently re-thought how to evaluate Amazon.
A year ago BMO Capital Markets changed its valuation methodology for Amazon to what it called “Stacked DCFs,” cumulatively valuing Amazon’s three primary businesses (the marketplace, AWS and advertising) instead of averaging them, thus giving Amazon higher multiples on revenue. “While it is unconventional, we believe this is an appropriate way to value the company,” wrote Dan Salmon, BMO Capital’s media and internet analyst, in the firm’s Amazon update.