Amazon (AMZN -1.64%) stock has plunged this year, and there's plenty of blame to go around.

Revenue is set to grow by just single digits this year for the first time ever, and profits have also taken a dive as Amazon over-expanded its capacity during the pandemic. Since then, macroeconomic headwinds weighed on both its e-commerce business and its cloud computing division, Amazon Web Services. 

However, with the stock down 50% this year, Amazon has become a popular pick to make a comeback in 2023. After all, the tech giant still has a number of competitive advantages, dominant positions in e-commerce and cloud computing, and promising new ideas like Amazon Go.

While Amazon's performance in 2023 depends at least in part on the macroeconomic environment, there's one thing in particular that would make the stock surge.

An Amazon delivery van waiting to be loaded.

Image source: Amazon.

Beefing up the bottom line

Historically, Amazon has prioritized top-line growth, focusing on market share gains and building the company for the long term rather than profits. 

However, that strategy seems to be running its course, as annual revenue is set to top $500 billion and growth seems to be slowing for both cyclical and secular reasons. 

With top-line growth decelerating, it may be time for Amazon to better monetize the massive business it's built while it was investing for the long term. Over the last four quarters the company lost $26.3 billion in free cash flow as it spent aggressively to expand its data centers, warehouses, and other infrastructure. 

Its accounting profits have also fallen -- operating income in the first three quarters of the year slipped from $21.4 billion to $9.5 billion.

With the stock plunging, revenue growth slowing, and profits down, the most important thing for Amazon to do to drive a recovery in the stock is cut costs and maximize profitability.

In the last few months the company took a number of steps to rein in costs, including closing and canceling dozens of warehouses, laying off 10,000 corporate employees, and shuttering a number of unprofitable business lines, including Amazon Care, which was once considered one of its most promising new ideas.

But the last few months have made clear how many unprofitable projects Amazon has. In its Alexa division, for example, the company is losing $10 billion annually. Amazon has operated outside of the U.S. for more than 20 years, but the company rarely generates a profit in its international segment. Through the first three quarters of the year, it lost $5.5 billion in its international segment.

Management has explained that the company is profitable in more mature markets like the U.K. and Japan, but it continues to expand Prime benefits in newer markets, which is driving those losses. Given the lack of return on its international investments thus far, the company may want to scale back on its international expansion.

Similarly, Amazon is on track to spend $15 billion on Prime Video this year, even more than Netflix spends on its streaming service. Amazon has no direct way of monetizing most of that video content. It only uses it as a secondary benefit to incentivize Prime membership and loyalty, which should also make it a target for cost-cutting.

Outside of AWS, Amazon lost more than $8 billion in the first three quarters of the year. Despite all the praise lavished on Prime, the program is actually losing money for Amazon, and that's unlikely to change without a direct effort to fix it.

Amazon's potential

Though Amazon is losing money in a wide range of areas, it has a number of high-margin businesses -- including AWS, which is on track to generate roughly $23 billion in operating income this year, and advertising, which is on track to produce more than $30 billion in revenue. Amazon doesn't report advertising profits, but it likely carries margins in the 20% or 30% range based on results from peers like Alphabet and Meta.

Finally, Amazon's marketplace also has the ability to generate high margins as it capitalizes on existing fulfillment infrastructure and its dominant position in e-commerce.

In other words, Amazon has the ability to be much more profitable than it is today, but the company needs to be more disciplined with its spending. 

If the company is able to cut costs and drive profits back toward 2021 levels, the stock could soar in 2023, especially after the share price got slashed in half this year.