*SUMMARY*: Amazon spent the last two years building infrastructure to support growth, and it’s now hitting their financials. However, it also means they’re prepared – with capacity, labor, and infrastructure – to compete in this next wave of commerce competition.
- Amazon is seeing lower profits in their Consumer business than prior quarters. Their increased cost structure (doubling both fulfillment capacity AND headcount in the last two years, as well as COVID-related headwinds) are now being fully realized.
- Operating income for the non-Amazon Web Services (AWS) segments of the business were negative, coming off of several quarters of positive numbers. Overall operating margin was positive at 2.5%, but took a hit of nearly 2 ppts q/q.
- Rivian provided significant benefit (about 80% of) Amazon’s bottom line. Without Rivian, Amazon’s net income would have been about flat to last quarter.
- Likely to boost profits, the price of Amazon Prime will increase in Q1 from $119/year to $135/year. We are also seeing other profit-boosting measures such as moving default shipping methods away from same-day or one-day to the Amazon Day (longer lead time).
- In response to a question re: increased cost structure, Amazon specifically cited contracts with vendors as one lever to improve it (look out vendors!)
- Growth has also slowed in their commerce business. North America (excluding AWS) net sales grew only 9% y/y, while International remained flat at -1% y/y.
- Amazon Web Services (AWS) (40% y/y growth) and Advertising (22% y/y growth, which they split out for the first time – see estimates below) continue to be bright stars, supporting my theory that Amazon is pivoting to become more of a services company. (Services=48.2% of net revenue; online and physical stores=51.8% of net revenue). Advertising is holding strong at approximately 7% total revenue.
- Physical stores, while only 3.4% of the business, are showing slow and steady y/y growth in Q2, Q3, and Q4, with a slight acceleration in Q4. This is something to watch as Amazon goes after the non-eCommerce channel for growth.
- On the call, they remained committed to ultrafast delivery, measuring themselves against pre-pandemic progress.
