Few companies can ever hope to reach a trillion-dollar valuation; last year Amazon (AMZN 1.66%) became the first company in history to ever lose $1 trillion from its market cap.
The stock has lost 45% of its value, the company is laying off 18,000 workers, and Amazon just announced it is killing off its charity program, Amazon Smile.
Image source: Getty Images.
Business isn't just the same. Retail sales growth is slowing; Amazon Web Services, the cloud services unit, saw its slowest growth on record. The company also had a cumulative loss of $3 billion over the first nine months of 2022, though it was profitable in the third quarter.
It's certainly not what many expected of the e-commerce giant. In fact, investors who bought the stock three years ago are right back where they started, and the trend certainly looks like it's still heading down. So let's see where Amazon might be three years into the future.
NASDAQ: AMZN
Key Data Points
Too much of a good thing
Amazon remains the go-to place to buy goods online, but there are limits. First-quarter sales fell to $56.5 billion compared to $57.5 billion the same period one year earlier and held flat in the second quarter versus $58 billion the year before. Although they did bounce higher in the third quarter as a result of its Prime Day sales extravaganza, the fourth quarter isn't expected to see the same result.
Part of the problem is that like so many companies, Amazon seems to have been fooled into believing the cadence of sales experienced during the pandemic was the new normal. It didn't see how quickly consumers would return to their usual shopping habits when the economy fully reopened.
Amazon is now saddled with an excess of warehouses. As CFO Brian Olsavsky noted last April, "Despite still seeing strong customer demand and expansion of our FBA (Fulfillment by Amazon) business, we currently have excess capacity in our fulfillment and transportation network." Amazon has since said it will slow future investments in capacity, being much more focused and targeted with where it locates a facility.
Adding up eyeballs
Amazon has also finally had to consider how it can further monetize its site. While many expect advertisers to line up for the chance for greater marketing opportunities on the platform, such as by running video ads, that doesn't necessarily translate into a positive customer experience.
Consumers already need to wade past banner ads and lines of sponsored products before reaching actual results for their searches.
Advertising services revenue exceeded $9.5 billion in the third quarter, up 30% year over year in constant currency.
The e-commerce giant also undermined its Prime program by increasing the cost of membership to $139 from $119 per year. While it's grown to 153 million members, it is no longer the no-brainer decision to join that it once was, and in fact may create far more churn than Amazon has been accustomed to in the past.
Image source: Getty Images.
Cloudy skies
Amazon's cloud services business is still the star of the show, but revenue growth of 27% to $20.5 billion is the slowest Amazon has seen, and segment operating income decelerated significantly last quarter, which Olsavsky highlighted to analysts on the earnings conference call.
"The broad disclaimer on AWS margins is that they will fluctuate over time as we balance investments versus renegotiating pricing with the long-term customer commitments, all as headwinds to the business, offset by increasing productivity and efficiencies in our data centers, which drive profitability."
Its facing higher labor costs, high electricity rates, rising transportation costs, and slowing demand in financial services, cryptocurrencies, and mortgages. Everyone is hunkering down. "Basically, what we see is customers are looking to save money versus their committed spend," Olsavsky said.
A bumpy road ahead
For all that, there's still reason to believe the next three years will be better for Amazon (and investors) than the last three years. While retail sales growth is slowing, it is still growing despite facing pointed competition from more companies, notably Walmart.
And advertising does have the potential to more than offset any volume decline, with estimates such revenue could double in the next few years. And where AWS is seeing certain markets impacted at the moment, companies hosting their data on AWS might see a chance to take a costly fixed expense and move it elsewhere for less. And Amazon continues to invest in what has long been its profit center.
Will Amazon stock gain back that trillion dollars it lost in three years? Doubtful, but I still find the long-term investment thesis on the e-commerce leader to be bullish, even if the immediate future is much more volatile.
