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What to Make of Amazon's Next CEO

By Chris Hill - Feb 9, 2021 at 7:35AM

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CEO changes are important.

In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool Chief Investment Officer Andy Cross to discuss the latest earnings news. Amazon's (AMZN 3.66%) fourth-quarter revenue of $125 billion takes a back seat to the news that founder Jeff Bezos will step down as CEO. AWS founder (and longtime Amazon employee) Andy Jassy will become Amazon's CEO later this year. Shares of Alphabet (GOOG 4.16%) (GOOGL 4.20%) popped 7% as fourth-quarter results are highlighted by Google's core ad business and revenue growth from YouTube. Andy analyzes those stories, as well as the latest quarterly results from Chipotle (CMG 4.59%).

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on February 3, 2021.

Chris Hill: It's Wednesday, February 3rd. Welcome to MarketFoolery, I'm Chris Hill. With me today, it's the Chief Investment Officer, it's Andy Cross. Good to see you, my friend.

Andy Cross: Hey, Chris, good to see you too. Thanks for having me on. What a day.

Hill: What a day. We're going to get to Chipotle's earnings, Alphabet's earnings, we're going to get to Amazon's earnings. But all of those stories take a back seat to the news that Amazon Founder, Jeff Bezos, is stepping down later this year as CEO. He's going to remain Executive Chairman of the Board. Moving into the corner office is Andy Jassy, who is currently the Head of Amazon Web Services. He's been at Amazon since 1997. Andy Cross, I was thinking about David Gardner this morning. Not just because he's held Amazon longer than anyone I know.

Cross: Yeah.

Hill: Yeah. David talks about looking for companies that are, as he puts it, obviously great. Andy Jassy is probably not a household name, but to paraphrase David, he strikes me as the obviously right choice for this job.

Cross: I think so. You just look at what he's done in Amazon Web Services and how I think he and Jeff Bezos really initiated that a decade plus ago. I think they may have even jammed it up, maybe just sitting around Mr. Bezos' house one day. But regardless, he was very instrumental in kicking that off and leading and now it's arguably the most important part of Amazon's entire store ecosystem. There's so many parts to the Amazon story nowadays. It's such a large company, so successful, arguably one of the most successful companies in commerce history. If you look back and certainly helped propel Jeff Bezos being one of the wealthiest people in the world, just from holding and owning so much Amazon stock. So, you think about the importance of Amazon Web Services and how Andy Jassy has been so important and instrumental to growing that business, and it seems like a natural fit. I think, while the timing may have been surprising to many of us, probably the succession plan is not as much.

Hill: I think it's important, one of the things that you said there in terms of how closely Jassy has worked with Jeff Bezos over the years, because of how big Amazon is, because of all the different business divisions, if you're just looking on the surface, you think, OK, well, if Jassy is the guy who started Amazon Web Services and that's where he's been. As important as that has been to the economic health of Amazon, it's reasonable to ask how clued in is he to the retail side of the business, to other parts of the business? But I mean, to the extent that Bezos has a shadow at the company, [laughs] it seems like Jassy has been that shadow for years now.

Cross: Yeah. It's interesting, Chris, I was just thinking back to other founders, very successful founders who have created multi-billions dollars. By the way, wealth, for so many people out there in so many different ways, not just shareholders, but just think of all third-party sellers now, think about all the various people who have benefited from Amazon over the years, including us. Just as consumers, what they had done, just history was just looking back and thinking through some of the handoffs and obviously, something like Sundar Pichai at Alphabet comes to mind. Satya Nadella comes to mind, even though there was a gap between the handoff from Bill Gates to Steve Ballmer to Satya Nadella. I think of Mark Parker. I think it was at Nike, who was an early designer, shoe designer back in the '70s with Phil Knight. Then went on to the whole variety of management positions and then led that business for Nike as well.

It doesn't always work out. I don't think it worked out quite as well the first time for Starbucks, I think it was Jim Donald maybe, it didn't quite work out as well there, and then Howard Schultz came back in and now they've moved on. Then been very successful too. Just thinking about the way that you want to see your innovative leaders and entrepreneurs who recognize that now is the time to start to think about handling the business over to maybe more of the operator side. Steve Jobs left us far too early, but obviously, the success that Tim Cook has had at Apple. It is daunting to step into a founder who has been so successful in that way. But the only way I think it works is to have someone who is the DNA really flows through that. I want to say it's really the product success DNA coming up. So those leaders I mentioned, Steve Ballmer, as successful as he was, I think, for years at Microsoft in his early roles. I think he struggled a little bit as the CEO and Chairman, CEO role there. But you bring somebody in like Andy Jassy, you're bringing someone like Satya Nadella, Sundar Pichai. Those kind of leaders who have been so successful, those organizations really tie to the best parts of the business, the product side, the customer side, really understanding the DNA of the organization. I think that's your success pattern and I think we're seeing it with Amazon today.

Hill: The other one I thought of was Craig Jelinek currently CEO at Costco. I mean, he started as a warehouse manager at Costco nearly 30 years before Jim Sinegal decided it was time to retire as CEO and hand off to Jelinek. By the way, thank you for pointing out that this doesn't always work. That was the one thing that irked me on Twitter that I saw last night about this story was a few people saying, "This really isn't a big deal. Changing CEOs is not a big deal." I just thought, "No, it actually is a big deal because if it weren't a big deal, it would succeed a hell of a lot more [laughs] than it usually does." I mean, a lot of times, particularly as you said in the case of founder-led companies, the handoff doesn't work. But I think Bezos has done everything to pick the right person for the job. I don't think we need to dwell too much on Bezos because he's not retiring, he's not leaving the company. He is changing roles at the company, he's not dying.

Cross: Yes.

Hill: We don't need to spend a lot of time on that. But holy cow, what a run. [laughs]

Cross: It's just been incredible just from what they've created. Looking for a great, amazing growth company, David has done this better than almost anybody out there, trying to find those first-mover companies, those top dogs and really emerging industries. Amazon basically created the e-commerce industry back in the mid-90s. It's been an absolutely stellar, incredible run. By the way, Amazon is not without its challenges. Now, it's obviously a much different company, and having someone like Andy Jassy and his team to be able to run it, I think it's a nice luxury that Jeff Bezos has created and earned to be able to turn it over to that team, and now with all of their opportunities, and challenges, and successes, and expectations, now baked in with such a large company at such a high stock price that's earned all of that respect around the world, I think. Then also, just some of the challenges that they are going to face in the regulatory side and just from the commerce side, and then from the competitive side, to be able to hand it off to someone as talented as Andy Jassy I think is a nice way that Jeff has built that company, really from the ground up.

Hill: Shares of Amazon are basically flat today. I think that's a testament to what the market at large thinks about the next CEO at Amazon. It may also have something to do with the fact that fourth-quarter sales came in at $125 billion [laughs] which is not only higher than Wall Street was expecting, but it was also higher than Amazon's own guidance.

Cross: Another incredible quarter. We've seen this now start to come to fruition obviously over the last couple of months with this massive consumer shift toward digital and the fulfillment that Amazon is doing now. Their fulfillment network, Chris, is growing 50% per year on a per square footage basis. That's just massive. They hired 175,000 part-time and full-time employees last quarter, just one of the largest employees out there. The 2020 holiday season was incredible on the growth side. The ability to be able to provide the types of services, both for their commerce business as well as for their AWS business, Amazon Web Services, and also for the services business that they're growing on the advertising front and other things as well too, it's just pretty incredible. They're now at 50 million monthly active users for Fire TV. They have so many branches now, and so many levers they are pushing in such a complex organization including, I think they've released plans for the new building in Crystal City in Arlington recently. It was a really incredible quarter with so much growth. You saw the continued success of Amazon Web Services, the sales growth monstrous for the quarter, and the profitability for Amazon Web Services continue to be the driver of the profit picture for Amazon, and that's just such an important part of their business to allow them to scale globally.

Hill: If it weren't for the CEO shuffle at Amazon, our lead story today would actually be Alphabet. Because Alphabet's fourth-quarter report was fantastic; profits and revenue came in higher than expected, the core ad business at Google was strong, and YouTube ad revenue came in nearly 50% higher than a year prior.

Cross: Chris, it was up 46%. That's just a real big driver, much faster than the overall ad growth that Google had which was still very respectable at 22%. The ad business, from the search, which is their core business, but really the evolving YouTube business and the way that they are monetizing that. Obviously, I think, for the last five years, there's just been lots of questions about how big is the YouTube business, how can they monetize it? Well, now it's just a massive part of their business, growing faster than their overall business, and that's going to continue. The YouTube video business is going to be a big part of their advertising driver, and we saw that certainly in the quarter. But of course, we can not talk about the cloud business, which now they're breaking out too. Fourth-quarter sales up 47%, so about match that YouTube ad growth business, now at $3.8 billion. It's much smaller than Amazon Web Services at about $13 billion on a per-quarter basis by the way. But from a revenue perspective, the percentage is much smaller too. It's 7% of Google's overall sales versus probably double that over at Amazon 12%, 13% of their overall sales. But the Google Cloud business continues to hum along, Google Workspace, which used to be now known as Google suite. They grew both their seats and their average revenue per user, and their backlog across all of their Google Cloud businesses has tripled over a year. So a really impressive quarter overall from Google across all businesses. Their other sales business was up 27%. They closed the Fitbit acquisition, that will now be part of the other sales, and the profitability picture because their costs were a little bit lower, and the operating profits in the quarter grew almost 70%. Overall, a very impressive quarter from Google as well.

Hill: You have to believe they've got a lot of confidence about the Cloud business if they're breaking it out. As you said, measure it however you want, it's not a huge part of the business yet, but the fact that they are now starting to break that out separately indicates, I think, some healthy level of confidence they have. You look at the stock, shares of Alphabet up more than seven% this morning. That's a big move for a company that's worth $1.4 trillion.

Cross: Yeah, it sure is, Chris. I think we knew, obviously, that Google Cloud was a big part, while maybe less than, say 10% of their sales overall, but a part of the growth engine and a part of their scale, and they are certainly making Ruth Porat, I talked about this on the CFO, the Chief Financial Officer talked about this on the call. The investments they are making, the Google Cloud, and to be able to scale up that business, it does take a lot of infrastructure obviously, and a lot of hiring to be able to drive the sales when it comes to Google Cloud. It's a much different type of sales business than what they have in their traditional search business, whether it's YouTube or just traditional search, making the right investments into that business. But overall, one of the facts that I was just looking at was the acceleration, Google's overall sales in the fourth quarter were far higher than they were throughout the year as they emerged from the COVID pandemic. It will be very interesting, and Ruth talked about this, they'll have a little bit less high hurdle jumps in the first quarter as they lap the COVID period, then in the second half it'll get a little bit more challenging for them. We're going to see that across all the businesses. That might obviously put a little pressure on some of the growth pictures and a little pressure on some of the multiples of our stocks.

Hill: Chipotle shares down a little bit this morning. Fourth quarter revenue was light, their same-store sales came in over 5.5%. I don't know, Andy, the reaction of the stock seems like the reaction you get when the burrito maker [laughs] has risen 70% in the past year. I'm like, well, their digital sales once again were huge, and it seems like they're doing a lot of things right. But against the backdrop of the last 12 months, this stock's up 70%. It's like, OK, I could see it selling off a little.

Cross: Chris, we've talked about the curse of high expectations maybe. By the way, Amazon, Jeff Bezos talked about this for really basically since Amazon became public in that everyday he just doesn't even pay attention to the stock price. I don't think they're probably doing it at Chipotle either. It was still a very impressive, I think, quarter compared to the environment we're in. As you mentioned, it was really driven by the digital sales now up 177% for the quarter, and now digital making up almost half of their business. It really does show the type of innovation, investments, and company that Chipotle has evolved into. They started this years ago, as they started thinking about building out their digital platform. They continued to put more and more investments into it, and then of course, over the last 18 months as the COVID pandemic and the quarantines really started to hit they obviously just ramped up the investments and that new leadership team that is in to it, to be able to scale out that digital platform, and now they make it seamless. My family has ordered from Chipotle numerous times on the digital app and we hadn't really, even before the COVID pandemic.

Now, its investments they've made, it's paying off. You're seeing the comp store sales growth. You're seeing the digital sales growth. We're going to see their profitability. It could very likely just change the company that Chipotle evolves into when it thinks about its growth prospects over the next five to 10 years as much digital, as much carry-in takeout as it was a traditional retailer or traditional restaurant company and that may impact how they build out their store print. Maybe smaller stores, much more focus on the back part of the restaurant, the kitchen part as much as the front part, then sit down and enjoy a meal at Chipotle in the store.

Hill: I'm not interested in their latest offering, but if you're a shareholder, I think you got to pleased with the results on cauliflower rice.

Cross: I've tried it. I like it. I think it's OK. Chris, I owe them. My family does not eat a lot of meat, so cauliflower rice.

Hill: The results bear it out in this quarter. It was one of those like, "Okay." We're all in favor of whatever a business is in, industry-wise, we like to see businesses trying new things. If you're in a restaurant business, yeah, roll out some new menu items. Again, I'm not buying the cauliflower rice, but plenty of other people are. If you're a shareholder, you have to be happy about that.

Cross: You know what's really interesting about that, Chris, it is one thing that Chipotle has done. They're very disciplined about how they roll out products. I know we've had our fair last about the queso offering they've had over the years, but they're very disciplined about how they roll out. They don't like to complex that menu. I remember when they rolled out the vegetarian, tofu-based meat product, which is what I get with the cauliflower rice, which I think is very good. Throw little spices in there and make it even better, but they are very disciplined about how they innovate and how they roll out those products. A part of it is obviously because of their sourcing process and discipline around that as well too. They don't just add willy nilly stuff to the menu and they keep that menu very focused. When they talk about something like cauliflower rice and the success they've had, it does make your ears perk up to say, "Hey. They're on to something now and that likely will be a continued mainstay on the menu, probably, for the next foreseeable future."

Hill: Andy Cross, always good talking to you. Thanks for being here.

Cross: Thanks, Chris.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition on MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening, we'll see you tomorrow.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,302.93 (3.66%) $81.38
Apple Inc. Stock Quote
Apple Inc.
AAPL
$149.64 (4.08%) $5.86
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$273.24 (2.76%) $7.34
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,246.33 (4.20%) $90.48
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,402.42 (4.59%) $61.51
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$76.71 (2.98%) $2.22
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$470.76 (1.24%) $5.77
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$115.99 (2.70%) $3.05
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,255.98 (4.16%) $90.06

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