One bright spot in Amazon's ugly quarter — its advertising business is growing like crazy

Key Points
  • Net sales in Amazon's "other" category, which primarily represents advertising, were $3.59 billion in the third quarter, up from $2.5 billion a year earlier.
  • The quarter saw 45% year-over-year growth in the segment, a sign of accelerating gains. Amazon saw year-over-year growth of 36% and 37% in the first and second quarters this year, respectively.
  • Analysts point to Amazon's ad business as a success this quarter.
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Amazon shares took a major hit after its third-quarter earnings fell short of expectations, but one bright spot was its advertising business, which appears to be picking up speed again.

Net sales in Amazon's "other" category, which primarily represents advertising, was $3.59 billion in the third quarter, up from $2.50 billion in the third quarter of 2018. The quarter saw 45% year-over-year growth in the segment, excluding a $500 million unfavorable impact from changes in foreign exchange rates during the quarter. That's a bit higher than in the first and second quarters of this year, when Amazon saw year-over-year growth of 36% and 37%, respectively.

The gains comes as Amazon's ad business continues to prove itself a formidable contender in the digital ad world. The company is expected to chip away at Google's dominance in search in the coming years, according to a new eMarketer forecast. It also recently held an event called AdCon to showcase Amazon's growing list of ad products, which drew about 400 people in Seattle, CNBC reported earlier this month.

CFO Brian Olsavsky said on Amazon's earnings call Thursday evening that the biggest element in the "other" category, advertising, grew at a rate higher than 45%. He said the company is focusing on its advertising experiences and helping businesses to find, attract and engage customers. "It's increasingly popular with vendors, sellers and third-party advertisers," he said.

He added that the company is also using machine learning to drive relevant ads.

"It's still early and what we're focused on really at this point is relevancy, making sure that the ads are relevant to our customers, helpful to our customers," Olsavsky said.

The company is also adding more video advertising supply on its Fire TV products.

Dave Fildes, the company's director of investor relations, said an area of focus is expanding video and over-the-top offerings for brands.

"It's still early in this space, but we've done a few things with IMDb TV, live sports, things like adding more inventory through Fire TV apps," he said. "And as I said IMDb TV, adding more OTT video supply through Amazon Publisher Services or APS integrations and streamlining access for third party apps and really just making it easier for advertisers to manage their campaigns and provide better results."

In July, Amazon opened up connected TV apps integrated with Amazon Publisher Services for advertisers working with Dataxu (which said this week it was being acquired by Amazon Fire TV competitor Roku) and The Trade Desk.

Many analysts pointed to Amazon's ad performance as a high point in its third-quarter earnings, with J.P. Morgan singling out its reacceleration and saying the company has solidified itself in the number three ad position, behind Google and Facebook.

SunTrust Robinson Humphrey analysts said the ad business growth rates could accelerate with "such a large opportunity ahead."

"This business should also have a major impact on profitability over time given its high margin profile," they wrote.

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