Cloud Computing Isn't the Only Exciting Catalyst for Amazon Stock. Here's One More.

Key Points

Amazon's advertising revenue rose 22% year over year on a constant-currency basis in Q1.

Advertising's trailing-12-month total now exceeds $70 billion.

New AI tools and streaming partnerships are widening the business's reach.

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Shares of Amazon (NASDAQ: AMZN) have staged a sharp recovery, recently touching fresh all-time highs after the e-commerce and cloud computing giant reported its first-quarter results last week. Most of the chatter since has centered on Amazon Web Services (AWS), which grew 28% year over year on a $150 billion annualized revenue run rate -- the fastest pace in 15 quarters.

But cloud computing isn't the only catalyst worth watching here.

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The company's advertising business now generates more than $70 billion in trailing-12-month revenue and is still compounding in the low-20s percentage range. For investors weighing where Amazon's earnings power could come from over the next several years, this is arguably the line item that doesn't get enough attention.

An advertising business hiding in plain sight

In Amazon's first quarter, advertising services revenue reached $17.2 billion -- up 24% year over year, or 22% on a constant-currency basis. Notably, that marked the fourth consecutive quarter of 22% currency-neutral growth. For perspective, this same line item was growing at 19% year over year just a year earlier and 18% in the fourth quarter of 2024.

What also stands out is the impact this segment has on Amazon's profit profile. While the company doesn't break out advertising's operating income, it is widely considered a high-margin business by investors and analysts. And with retail being known for being a low-margin business, we can speculate that Amazon's advertising business is accretive to its overall earnings, given the company's significant reliance on e-commerce as a major business segment.

And of course, we already know that AWS is a high-margin business. So this gives Amazon yet another earnings catalyst from a business growing at a strong double-digit rate.

To this end, it's not surprising that the company's first-quarter operating margin reached 13.1% in Q1 -- the highest ever for the company.

Why the growth could keep going

So what could keep this momentum going?

CEO Andy Jassy spent meaningful time on Amazon's first-quarterearnings calldescribing how the company is widening both the reach of its advertising platform and the tools available to advertisers.

On reach, Amazon recently deepened its partnership with Netflix through Amazon Audiences -- a feature that lets advertisers apply the company's proprietary signals from its shopping and streaming platforms to Netflix's viewer base. The tech giant also announced an expanded local-advertising partnership with Comcast Advertising and rolled out interactive video ads.

On tools, the company expanded CreativeAgent -- an artificial intelligence (AI) partner that helps brands plan and produce ad creative -- to seven additional countries. It also introduced sponsored product and brand prompts inside Rufus, its AI shopping assistant. Rufus itself is starting to look like a meaningful ad surface in its own right, with monthly active users up over 115% and engagement up nearly 400% year over year in the first quarter.

Further, Jassy has framed the rise of agentic, AI-driven shopping as a tailwind for advertising rather than a headwind. He explained on the company's first-quarterearnings callthat agentic shopping experiences tend to involve "multi-turn conversations" rather than a single search, giving Amazon repeated chances to surface a product -- some organic, some sponsored.

"I believe that advertising will do well in a world of agentic commerce," Jassy concluded when discussing advertising during theearnings call

Of course, Amazon doesn't disclose advertising operating income, so the precise profit contribution remains a bit of a black box. And the business is also tied to retail demand and broader ad-spending cycles, both of which can soften in a weaker economy.

Still, with the stock back near all-time highs, the bull case for shares is no longer leaning solely on AWS. Advertising has quietly grown into a $70-plus billion business compounding in the low-20s percentage range, with what are probably software-like margins and a roster of AI tools that could keep the pace going.

In short, advertising may be the more underrated half of Amazon's growth story.

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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.