Amazon Can Improve Margins By Seizing Its Advertising Opportunity

Amazon (NASDAQ:AMZN) is planning a new strategy to leverage the advertising potential on its websites. The e-commerce giant has reportedly built a platform to deliver specifically targeted ads to shoppers who leave Amazon’s virtual selection to browse other sites. ((Amazon, Advertising’s Sleeping Giant, to Awaken in 2013, Adweek, December 2012)) The platform can be used to push through ads on associated websites like Amazon, IMDb and other ad exchanges about items a user may have searched on Amazon’s websites but didn’t purchase.

These ads can potentially redirect the traffic to Amazon’s website with the lure of latest offers and could provide substantial upside to Amazon’s marketplace sales. Amazon’s marketplace sales constitute about 70% of our price estimate for the company, and an increased conversion rates of visits could substantially improve revenues.

See our full analysis for Amazon’s stock here

The real time service works by dropping a cookie in the user’s browser after he/she has surfed Amazon’s marketplace for an item, but didn’t complete a purchase. The underlying software behind the real time bidding platform will then analyze the user’s shopping pattern and follow him through his browsing with targeted ads. These ads can bring in substantial revenues for the company through sales as the ads promote new offers/prices for products. The platform can also be used to generate additional revenue from advertising for Amazon as it can use the technology to sell ad space to companies that sell products on its websites.

The technology developed by Amazon is expected to allow advertisers to buy their own ads on a “self serve” basis, eliminating the need for hand holding by ad reps, presently required when dealing with ad exchanges. With advertisers constantly tweaking their algorithms to improve their target audience, a self serve model which is easy to configure as the Amazon Web Services dashboard can result in substantial cost saving and attract advertisers from competition.

This can be a welcome change in the ad industry as even though targeting of ads at users in real time is the norm, the process of buying ads on the exchanges that sell these ad spots is complicated enough for it to be left to specialized services like Triggit.

If Amazon goes ahead with the launch of their real time ad business, it could expect improvements in their company-wide margins, and also be able to price products and shipping more aggressively.

The real time bidding platform will place it in direct competition with Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG).

We have a $218 estimate for Amazon which is 12% below the current market price.