Did Amazon just say “Checkmate” to the alphabet?

When you think about Amazon (AMZN 0.69%)I bet your first thought is its online store. But the company has many other businesses connected throughout its ecosystem, and its fastest-growing revenue stream over the past year has been its advertising platform.

What’s more, the company appears to be doubling down on its advertising efforts after striking major partnerships with social media platform TikTok and photo-sharing app Pinterest.

Amazon seems poised to become a disruptor in the social media platform market, and I think that could be a big problem for Alphabet (GOOG -0.79%) (GOOGLE -0.80%).

Analysis of Amazon’s Deals with TikTok and Pinterest

Have you ever seen an advert on your social media page, but when you clicked it, you were redirected to a completely different website?

This dynamic is all too common at the intersection of social media and e-commerce, and it can make or break a user’s in-app experience. Given that social media platforms are hyper-focused on engagement, closing the gap between in-app experiences and user monetization is a big priority—and Amazon may just have a great solution.

Amazon’s partnerships with TikTok and Pinterest are nothing new. But the latest development in its relationship with these platforms feels like a breakthrough.

Now, users who view videos or photos on TikTok and Pinterest can purchase related items from Amazon without visiting its website. In other words, they can shop natively within the social media apps. It’s worth noting that Amazon already has this feature integrated into Snap also.

At first glance, the advantage is that it makes the user experience much more seamless and convenient. However, I see this as a big counter to Alphabet’s dominant ad platform, which could provide lucrative long-term tailwinds for Amazon.

Amazon will allow TikTok users to shop directly in the app.#AMZN #TikTok #AMZNStock #AmazonStock #AmazonTikTok #TikTokAmazon #Amazon #ShoppingAmazon #AmazonAds$AMZN photo: twitter.com/rZwnxl11K7

— WealthWise (@WealthWise_dca) August 9, 2024

Why is this such a big blow to Alphabet?

Alphabet owns internet search giant Google and video-sharing platform YouTube, which consistently ranks as the world’s most visited website, attracting more than 100 billion visits per month.

Given its online presence, it’s not surprising that Alphabet’s primary source of revenue comes from advertising. However, Alphabet’s ad revenue has been under pressure for some time.

Data source: Alphabet. YoY = year over year.

The numbers above bear careful analysis. Google ads essentially plateaued in the first half of 2023. However, Alphabet seems to be turning things around and has accelerated ad sales over the past few quarters. That said, I don’t think Alphabet should be viewed as the de facto solution when it comes to acquiring marketing dollars.

Google Search is undoubtedly facing some notable competition for the first time in decades, mainly due to the introduction of large language models (LLMs) such as ChatGPT and Claude. In addition, YouTube is facing fierce competition from Finish Instagram, as well as TikTok, Pinterest, and Snap, all have partnerships with Amazon.

Amazon’s Chess Move

While Alphabet has proven it can monetize users of its platform through advertising, I have my doubts about whether the company can really go much further. For example, if someone searches for a product on Google and then makes a purchase, I’m skeptical about Alphabet’s ability to further leverage that interaction through cross-selling.

But I think that dynamic is exactly what Amazon is trying to achieve with social media. Social media platforms are more commonly used by younger demographics, and those are the cohorts that prefer online shopping to brick-and-mortar retail.

TikTok, Snap, and Pinterest now serve as lead-generation sources for Amazon, drawing younger, e-commerce-heavy shoppers to the company. In theory, that could help Amazon build deeper brand loyalty among new customers and become their default online store. Over time, the real win would be for those customers to become Amazon Prime subscribers.

If Amazon can grow its Prime membership base through partnerships with leading social media players, it will not only generate more advertising revenue, but it will also boost e-commerce sales.

So while Alphabet remains a leader in internet search and video sharing, growing competition and alliances between other big tech players could pose a serious problem for it in the future. Amazon, on the other hand, is positioning itself to benefit from monetizing social media users in more ways than one.

In my opinion, Amazon just took a big step toward potentially dethroning Alphabet as the king of online advertising. Investors should closely monitor Amazon’s revenue acceleration and margin expansion as its relationship with social media platforms continues to grow.

Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former Facebook chief market development officer and spokeswoman and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco holds positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool holds positions in and recommends Alphabet, Amazon, Etsy, Meta Platforms, and Pinterest. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.