Full article at WSJ (paywalled).
A macroeconomic slowdown coming just as Amazon has been trying to absorb a major expansion of its fulfillment capacity has proved especially unfortunate for the e-commerce company. When it reports full results for 2022 later this month, Amazon is expected to show its first-ever year of percentage revenue growth in the single digits, while operating margins have fallen by more than half from the previous year.
Wall Street hasn’t been kind; Amazon’s share price fell 50% in 2022—its worst year since the dot-com bubble burst and notably worse than its mega-tech peers’, save for Facebook-parent Meta Platforms. Amazon has shed more than $1 trillion in market value since the stock peaked in July of 2021, during Mr. Jassy’s first week on the job.
But unlike the woes of Facebook’s parent, Amazon’s troubles can’t really be blamed on a massive strategic misstep by its current boss. The slowing economy has hampered both retailers and cloud companies, Amazon’s two main businesses. And the ill-timed decision to blow out Amazon’s delivery network was made under the supervision of former chief Jeff Bezos. Mr. Jassy is overseeing layoffs now expected to affect more than 18,000 workers—mostly among corporate staff—The Wall Street Journal reported on Wednesday.
Over the longer term, it falls on Mr. Jassy to chart a new phase for Amazon. And chances are, it won’t look like the old. Amazon has managed to defy the law of large numbers for a while now; revenue growth averaged 28% annually for the five-year period ending in 2021—beating growth at Apple, Microsoft and Alphabet—even as Amazon’s annual sales approached the $500 billion mark. But growing at even half that rate over the next five years will require Amazon to eventually be adding $100 billion of new business annually.
In a word: unlikely. Hence, Amazon under Mr. Jassy will need to mind the company’s bottom line more closely. Amazon has never commanded the same kind of margins as its tech peers, given its retail focus, but its growing proportion of cloud revenue has kept its operating margin above 5% for the past four years—more than double what it averaged over the previous four.
Consensus estimates currently have Amazon’s operating margins crossing into double-digit territory by 2027; delivering on that even sooner could help Mr. Jassy win back investors. The company’s booming advertising business will help here. Amazon now generates about $38 billion in ad revenue and has the third-largest share of the U.S. digital ad market, according to Insider Intelligence.
Still, Amazon’s two core businesses both face tough challenges in 2023. The prospect of a global recession will damp retail shoppers’ propensity to spend. Nationwide holiday e-commerce sales rose only 3.5% this year, compared with 8.6% last year, according to data released Thursday by Adobe.
Meanwhile, the AWS cloud business could be hurt by the same economic weakness, as its big corporate clients are forced to trim their own expenditures. UBS analysts cut their full-year projections for both AWS and Microsoft’s competing Azure business on Tuesday, citing “the worst tone that we’ve heard in years” from large cloud customers.
Some of Amazon’s newer business ventures carry risk as well. It now owns MGM, and thus reportedly intends to spend $1 billion a year to make 12 to 15 theatrical movies, whose profitability will depend greatly on whether more people find their way back to theaters. And the pending acquisition of 1Life Healthcare won’t pad the bottom line either. The primary-care provider has lost money over the past three years and is projected to do so over the next three.
Amazon is famously inventive, and driven—it still owns the relentless.com designation that Mr. Bezos once considered for the company’s name. And Mr. Jassy’s success in creating from scratch a corporate-software business whose annual revenue is now second only to Microsoft’s shouldn’t be dismissed either. Mr. Bezos also once considered naming Amazon “Cadabra,” in reference to the famous magician’s line. It now falls to his successor to pull some real growth and profitability tricks from his hat.
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