Amazon's (AMZN) status as the first destination for retail searches should serve to bolster advertising revenue in its quarterly report.
The Seattle-based ecommerce giant is capturing a bit of Alphabet's (GOOGL) lion share of the global advertising market.
According to a report from the Interactive Advertising Bureau, the global online advertising market stands at nearly $100 billion, 90% of the which was controlled by Facebook (FB) and Google at the close of 2017. Amazon might be shifting the landscape in 2018.
"Google and Amazon are in direct competition," Wedbush Securities analyst Michael Pachter told Real Money. "Advertising revenue for both comes directly from searches."
He said that the choice of shoppers to simply shop on Amazon rather than finding products through Google should add to Amazon's advertising clout.
"The question is whether people have moved searches from Google, at least partially, to Amazon," he explained. "The answer is yes."
Pachter is expecting a beat on earnings driven in part by the positive advertising momentum established this year.
He reiterated his outperform rating and set a $2100 price target for the company ahead of the release.
Credit Suisse analyst Stephen Ju pointed out that the ramp-up in advertising is also beneficial in generating more free-cash flow for the retail behemoth.
He cited "faster-than-expected free cash flow growth vis-à-vis its advertising segment" as a long-term factor backing his own outperform rating for Amazon and a bullish price target of $2400.
The growth in advertising and the benefits it offers are not new subjects for Amazon either.
Piper Jaffray's Michael Olson pointed to the segment as a key point of observation for investors in a note in August, expecting the segment to double revenue by 2020.
"Investors should be focused on Amazon advertising now; this is a major driver to results and valuation today and continuing in the coming quarters & years," he wrote. "By 2021, we believe it is likely that advertising operating income will exceed AWS."
That said, the changeover in advertiser behavior and accelerated ad growth is not souring estimates on Alphabet either, as many feel they can co-exist in advertising.
"I think Google is going to crush earnings," Pachter told Real Money. "They are killing it on mobile and YouTube. If anything, Street estimates are too low, especially on profitability."
He said he expects both companies to report advertising growth even amid some exchange of advertising dollars as the market is large enough for both to take massive profits.
Trip Miller, founder and Managing Partner of Gullane Capital, told Real Money that he likewise expects growth in both companies.
"It's not like they are Coke and Pepsi," he said. "They don't have to cannibalize each other in a growing market like this."
Miller manages an undisclosed number of share in Amazon. He noted that he is not adding to this position any time soon, even amidst its recent dip.
"We've held onto the stock since it was below $500," he explained. "We still think it's undervalued, but it's just not cheap enough for us right now."
Both stocks are rising more than 5% as market optimism builds heading into earnings.
