Amazon's "midlife crisis"

Introduction: E-commerce retail business declined, cloud computing business growth slowed down, net profit loss, American technology giant Amazon also began to suffer a "mid-life crisis".

Li Ping| Written by Gravel Business Review | produce

1

A bleak quarterly report

Not long ago, Amazon announced its financial results for the fourth quarter of 2022 (as of December 31, 2022) and the full-year 2022 financial report.

Data show that in the fourth quarter of 2022, Amazon achieved revenue of $149.2 billion, a year-on-year increase of 9%; Net profit attributable to parents was $278 million, down 98% year-on-year, which is also the fourth consecutive quarter of year-on-year decline in Amazon's net profit since 2022.

For the whole year of 2022, Amazon achieved operating income of $514 billion, a year-on-year increase of 9%, the lowest growth rate since the company's listing; Net loss for the full year 2022 was US$2.7 billion, far below the US$33.4 billion net profit in 2021.

Amazon attributed its 2022 losses to its investment in electric car startup Rivian. In November 2021, Rivian, known as the "Tesla killer", successfully IPO, with a market value of more than $100 billion in just two days of listing, surpassing many established car companies such as Ford and General Motors. As Rivian's largest shareholder, Amazon (17% stake) recognized $11.8 billion in pre-tax valuation gains in the fourth quarter of 2021.

2022 is Rivian's year of water reversal. Affected by factors such as less than expected deliveries and large-scale recalls, Rivian's share price fell by as much as 82% in 2022. As a result, Amazon lost $2.3 billion in pre-tax valuation of investments in the fourth quarter of 2022 and $12.7 billion for the full year of 2022.

Even without accounting for investment losses, Amazon's profit side is still not performing well. For the full year of 2022, Amazon achieved an operating profit of $12.2 billion, a significant decrease from the same period last year ($24.9 billion). Among them, the sharp rise in costs has become a major reason for the company to increase revenue without increasing profits.

Since the outbreak of the new crown epidemic, driven by demand such as remote work, Amazon's online retail, cloud services and other businesses have expanded rapidly, and the number of employees has also continued to expand. In addition, in order to establish its own logistics distribution system, Amazon has increased its investment in building its own logistics system. Data shows that from 2019 to 2021, the number of Amazon employees increased from 798,000 to 1.6 million, an increase of more than 100% in three years.

Since 2022, as the global new crown epidemic has been gradually brought under control, some consumption has returned to offline physical stores, and the revenue growth of Amazon's online retail business has been limited, and the expense ratio has been further pushed up.

Affected by the continuous rise in labor costs and logistics expenses, Amazon's operating profit margin has declined year-on-year for four consecutive quarters. From Q1 to Q4 of 2022, Amazon's operating profit margin was 3.2%, 2.7%, 2.0% and 1.8%, respectively, and the operating profit margin continued to hit a new low.

In response to increasing cost pressures, Amazon has already controlled costs in the fourth quarter of 2022 by closing some stores, cutting projects, and freezing hiring. In January 2023, Amazon announced a new round of layoffs, bringing the total number of layoffs to 18,000, a record high.

In the financial report, Amazon made an outlook for the new year's performance, and net sales in the first quarter are expected to reach $121 billion, with a year-on-year growth range of 4%-8%; Operating profit is expected to be in the reach of $4 billion, both of which fall short of market expectations.

Dragged down by poor performance, Amazon's stock price fell 8.43% to $103.39 on the day of the earnings report, and its market value lost $97.1 billion in one day. In November last year, Amazon's market value fell to $851.8 billion, more than $1 trillion from its peak in July 2021 ($1.88 trillion), making Amazon the first public company in history to lose more than $1 trillion in market value.

2

The aura of cloud business is no longer there

Compared with the cold quarterly results, the slowdown in the growth rate of Amazon Cloud business seems to make people more worried about Amazon's future.

Amazon's main business is divided into two categories: retail business and cloud computing services. Among them, the retail segment can be subdivided into five parts: online self-operation, offline retail (physical stores), third-party merchant services (online 3P seller commissions and performance fees), membership and subscription services and online advertising.

In terms of revenue proportion, online retail, third-party merchant services and cloud computing business belong to Amazon's three core businesses. In particular, the rapid development of cloud computing business has always been an important engine to promote Amazon's performance growth and contributed most of the company's profits.

In 2022, affected by the macroeconomic downturn, slowdown has become the keyword of the global cloud computing market. According to Gartner's latest forecast, global public cloud end-user spending is expected to grow from $401.9 billion in 2021 to $494.7 billion in 2022, an increase of 20.4% year-over-year, down nearly 3 percentage points from the same period last year (23.1%).

In this context, the growth rate of Amazon cloud business has shown obvious signs of slowing down. From Q1 to Q4 2022, Amazon Cloud revenue growth rates were 37%, 33%, 27% and 20%, respectively, and the revenue growth rate continued to hit a new low since 2014. In addition, Amazon Web Services operating profit for the fourth quarter was $5.205 billion, also down from $5.293 billion in the same period last year.

In addition to the macroeconomic downturn, the intensification of industry competition is also an important reason for Amazon Web Services to encounter headwinds. In particular, the menacing Microsoft Cloud is challenging the supremacy of Amazon Cloud.

According to Canalys statistics, in 2017, Amazon Cloud's share of the global IaaS public cloud service market was as high as 49.4%, and Microsoft's cloud was only 12.7%. Since 2018, Amazon Cloud's share of the IaaS public cloud service market has continued to decline, and the challenger is Microsoft Azure.

Due to the inherent lack of software genes, Amazon Cloud is obviously weak in the PaaS and SaaS layers, mainly relying on platform layer partners such as SAP and Salesforce to make up for it. Microsoft Cloud, on the other hand, continues to penetrate into the IaaS layer with its deep precipitation in the IT field and software layer advantages, and continues to encroach on the basic disk of Amazon Cloud.

According to the latest data from Canalys, in the fourth quarter of 2022, Microsoft Cloud accounted for 23% of global cloud infrastructure services, an increase of 1 percentage point year-on-year; The proportion of Amazon Cloud dropped from 33% to 32%, and the gap between the two sides narrowed to 9 percentage points.

With the full line of IaaS, PaaS and SaaS in the three fields, the revenue volume of Microsoft cloud business has approached the Amazon Cloud. The data shows that for the whole year of 2022 (natural year), the total revenue of Microsoft Intelligent Cloud will be about $79.8 billion, just one step away from the revenue scale of Amazon Cloud's $80.1 billion.

As far as Amazon is concerned, its retail itself requires a large number of computing, storage, network resources and other resources, and the development of cloud computing business can be described as killing two birds with one stone. Therefore, there have been no strategic mistakes in the development of Amazon Cloud. The reason why Amazon Cloud is losing in the confrontation with Microsoft Cloud is more due to its software ecology and lack of customer resources. This difference in capabilities caused by resources and endowments seems to be an unsolvable problem, which is also a long-term concern of Amazon Cloud.

3

The e-commerce business is under siege on all sides

"Investing in Alibaba is one of the biggest mistakes I've ever made, I was attracted by its position in the Chinese market, but it has always been a retailer, retail is a competitive business on the Internet, Ali is a competitor to everyone on the Internet, this is not something that Ali can easily do."

Munger's reflection on investing in Alibaba also applies to Amazon.

In 2022, Amazon's online retail business will continue to be sluggish due to factors such as rising inflation, potential recession, and the return of consumption to offline physical stores. From Q1 to Q2 2022, Amazon's online retail business revenue shrank for two consecutive quarters.

Affected by the downturn in e-commerce business, the revenue growth rate of Amazon's third-party merchant services, subscription and advertising services decreased year-on-year. As CEO Andy Jassy once said on a conference call, "key areas of the company's business are moving in the wrong direction."

In addition, Amazon's dominance in the global e-commerce market is under threat as competition continues to intensify. In the US domestic market, traditional supermarkets such as Wal-Mart and Costco are actively counterattacking the line. In last year's "Black Friday" Christmas promotion, Amazon's online search volume lost to Walmart, Target and Kohlz, ranking only fourth.

According to Insider Intelligence data, Amazon's share of the US e-commerce market will decline from 38% in 2021 to 37.8% in 2022, the first year-on-year decline in history. At the same time, the growth rate of total merchandise value (GMV) in Amazon's e-commerce business also hit a new low in more than a decade.

With the first two quarters of 2022 being too sluggish, the secondary market seems to be no longer expecting Amazon's retail business. From the fourth quarter of last year, Amazon's non-cloud business revenue growth rate has rebounded to a certain extent, even slightly exceeding market expectations.

Financial report data shows that in the fourth quarter of last year, Amazon's online retail business revenue was $64.5 billion, down 2% year-on-year; Third-party seller service net sales were $36,339 million, up 20% year-over-year; Net sales of subscription services were $9,189 million, up 13% year-over-year; Advertising services revenue was US$11.557 billion, up 19% year-over-year; Brick-and-mortar net sales were $4.957 billion, up 6% year-over-year; Other net sales were $1,253 million, up 77% year-over-year.

It is not difficult to see that in addition to the online retail business, Amazon's non-cloud business has achieved positive growth, especially the revenue growth rate of the three segments of third-party seller services, subscription services and advertising services has remained above double-digit levels. In total, Amazon's retail segment achieved revenue of $127.8 billion in the fourth quarter, a year-on-year increase of 6.8%, 3.5 percentage points higher than market expectations.

However, Amazon's use of sales commissions and advertising price increases to increase the revenue of third-party seller services and advertising is obviously suspected of "draining and fishing" under the circumstances of online retail abuse, and has not won the recognition of investors.

On the eve of Black Friday last year, Amazon also issued a price increase notice on sales fees and logistics, which made many Amazon sellers very dissatisfied. It is reported that a considerable number of sellers are forced by profit pressure to give up participating in the year-end "peak season" that should have sprinted performance.

In 2022, Amazon's advertising business had an annual turnover of $37.75 billion, a year-on-year increase of 19%. During the same period, Google, Meta and Apple's advertising business all declined. However, this is not something to be proud of for Amazon, and the rising ad expense rate has made more and more third-party sellers miserable.

Some analysts believe that in response to slowing sales growth and rising costs, Amazon has chosen to squeeze more money from the nearly 2 million small businesses that sell products on its online marketplace. According to Marketplace Pulse research data, in 2022, the average fee ratio collected by Amazon from each sale exceeded 50% for the first time, and "Amazon tax" has become an unbearable burden for many small and medium-sized businesses.

Under the leadership of founder Jeff Bezos, Amazon has gradually developed from a small e-commerce online bookstore to a consumer and technology giant integrating e-commerce, cloud computing, artificial intelligence, and offline physical stores since its inception in 1994, and is also the second listed company in the United States with a market value of more than trillion dollars after Apple. Among them, Bezos's own long-termism, customer first and other business philosophies have contributed greatly to the achievement of Amazon's trillion-dollar business empire.

With Bezos' retirement, Andy Jassy became Amazon's new helmsman. At present, the former head of Amazon Cloud business seems to have not found the strategic direction of the retail business, and is more concerned about the current business performance. Under the pressure of performance, Amazon's 10,000 layoffs have led to panic among the insiders, and a series of measures to transfer pressure to platform merchants have caused dissatisfaction among small and medium-sized sellers. In addition, the ban storm in 2021 caused many Chinese sellers to "flee Amazon".

"It's getting harder and harder for these small businesses to make a profit because they're spending more and more money on Amazon services. Amazon may be tempted to continue increasing fees because it is in a difficult situation, but the company must strike some sort of balance. Juozas Kaziukenas, CEO of Marketplace Pulse, said worriedly.