Amazon To Take Crucial Advertisement Revenue Hit From Coronavirus Marring Recent Growth In Segment

Feb 25, 2020
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In addition to categorizing the vast repository of information that we dub as the internet, Google's algorithms are also responsible for delivering to users accurate responses for their product-related, purchase-based queries. When you search for a product on the company's homepage, you're more likely than not to find paid-for content being displayed in the top handful of spots.

Given that the Mountain View, California-based company's search engine is the largest in the world, this naturally grants Google the biggest share of spending in the online advertisement pie. However, the rise of market sellers pushing their products on Amazon.com, Inc (NASDAQ:AMZN) has led to the retailer slowly clawing at Google's advertising revenues. Now, the 2019 novel coronavirus (COVID-19) is looking to halt Amazon's progress in the arena dead in its tracks - at least for a quarter or so.

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In its fourth quarter of the fiscal year 2019, Amazon earned $4.8 billion in revenue through its ''Other'' segment. This segment accounts for the digital advertisement spending made by merchants on Amazon's platforms, with revenues from it starting to become a headache for Alphabet Inc's Google.

Research estimates believe that revenues from the 'Other' segment will grow 400% from 2019 and stand at $40 billion in 2023 - in a time when Google is expected to earn $230 billion from digital advertisement earnings. Amazon's $10 billion annual revenues in the area last year have landed the company 7.6% share of the pie, with Google and Facebook dominating through a combined market share of 61% according to data from eMarketer.

Amazon's advertisement revenues grew by 41% in the fourth quarter of the fiscal year 2019 and stood at an all-time high of $4.8 billion; Chart: Marketing Land

The fourth quarter of most fiscal years is a good one for Amazon's advertisement revenues, as sellers look to capitalize on holiday season purchases. If you click on the link shared above, you'll also see that for 2020, Amazon is projected to increase market share for digital revenues from 7.6% last year to 8.6% this year as Facebook and Google lose a few points to regain growth in 2021.

Now, as the Wuhan coronavirus bloodied major indexes yesterday, with semiconductors and companies with Chinese supply chains taking the bulk of the hit, it looks as if Amazon too will suffer in the form of reduced merchandiser spending for advertisements on its platforms. This tiny detail with important strategic repercussions for the company is courtesy of the New York Times, which reports:

Over the past few weeks, Amazon has responded to the crisis by making larger and more frequent orders of Chinese-made products that had already been shipped to the United States, according to company emails and consultants who work with major brands. Some of its suppliers have cut back on advertising and promotions on the site so they don’t run out of products too quickly.

Amazon earned $87 billion through net sales in its previous quarter, making advertisement revenues 5.5% of the company's total revenues; Company presentation

Merchant fright decreases advertisement spending - the extent of drop is unknown for now

While this small statement can not let us quantifiably estimate any drop in Amazon's advertising revenues due to the 201 Novel Coronavirus, it nevertheless comes at a worrying time. Amazon's 2020 Prime Day is due in a couple of months, and should coronavirus-related disruptions continue to affect its merchants' supply chains and continue to cut spending, then the retailer will see drops in merchant advertisement spending lasting more than a quarter. And given that Prime Day takes place during midsummer, these drops will effectively have hurt Amazon for six of the year's twelve months.

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Looking at these gloomy estimates and previous revenue in the segment, the only question that investors, analysts and everyone else interest should be asking is whether advertisement revenues for 2020's first and second quarters will witness a year-over-year drop. Given that the Times believes that only ''some'' of Amazon's merchants have reduced spending, it doesn't appear to be the case. Yet, logically, 'some' can also encompass 'all', your guess is as good as ours.

The nature of Amazon's merchant problems is further complicated by the complexity of supply chains. So, for instance, smaller sellers might rely on a handful of plants in China who then rely on more plants for their raw materials. This makes for a multi-stepped supply chain where different points stand vulnerable for disruptions caused by the coronavirus. For instance, if Merchant A relies on products from Factory B which in turn gets its raw materials from Supplier C, then a disruption in either B or C's facilities will impact A's inventory. So while B might have recovered fully from the 2019 Novel Coronavirus, unless C recovers too, manufacturing stands disrupted unless an alternative supplier is found.

All-in-all, what's confirmed is that a key growth area for Amazon has felt the brunt of the Coronavirus. Whether it'll continue to do so, and what extent the losses will be, only time will tell. At the time of publishing, Amazon.com, Inc ((NASDAQ:AMZN)) is trading at $1988/share, down by 1.02% over yesterday's close.

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