Last quarter certainly wasn't the one Amazon (AMZN -1.77%) shareholders were hoping for. Not only was it the least profitable Q4 since 2014, the report capped off the company's biggest-ever annual loss. Cloud computing revenue growth is slowing as well, and this segment's profit margin is starting to shrink. Despite beating analysts' revenue estimates, companywide earnings fell short of expectations, as did Amazon's guidance for the quarter now underway. No wonder share prices are down 10% since the numbers were posted Feb. 2.
Before giving up on Amazon stock, however, there are a couple of things you ought to know.
Amazon's cloud computing growth isn't exactly slowing
From a certain technical perspective, it's true that Amazon Web Services' (or AWS') sales growth is decelerating. Last quarter's year-over-year revenue increase of 20.2% is below the growth paces nearer 30% we saw for the several quarters leading up to Q4.
Keep things in perspective, though. On an absolute, numerical basis, AWS' revenue growth is still more or less in line with its trajectory for the past four years. It would take a lot for cloud computing sales growth to continue accelerating in order to mathematically maintain a constant, relative rate of forward progress.
Data source: Amazon. Chart by author. All figures are in billions of dollars.
Yes, Amazon Web Services' operating income also hit a wall during the fourth quarter of last year. Again, however, keep things in perspective. The current wave of inflation is impacting all sorts of costs, including hardware, personnel, and industrial real estate. Even the cost of electricity is up, making it more expensive to power Amazon's warehouses of cloud computing servers. It would have been surprising if the cloud computing segment had continued to grow its total net profitability.
The thing is -- and this is the piece of the puzzle largely being overlooked by the market -- many of these cost increases are projected to fall this year.
For instance, although it will take some time for these price drops to be of any benefit to its customers, Rystad Energy believes wholesale electricity prices will decline between 10% and 15% in 2023. Analysts with real estate investment trust (REIT) CBRE Group further predict this year's new warehouse lease signings will come in 10% to 15% below last year's levels, suggesting some cost relief is in the cards for renters like Amazon Web Services.
And it's not like demand for public cloud computing services is weakening. Market research outfit GlobalData estimates the cloud computing market itself will grow at an average annual pace of a little more than 15% through 2026.
Inflation is being tamed, as are Amazon's costs
Cooling inflation won't just benefit Amazon's cloud computing operation. It will help the company's e-commerce business as well -- perhaps even more so.
In retrospect, Amazon overinvested in its response to the COVID-19 pandemic. It hired too many new people, signed too many new leases, and did so at too high of a cost in an effort to meet a then-surging but ultimately temporary degree of demand growth. And it did all of this not realizing just how much its freight and inventory costs would soar in 2022. Now those decisions are taking a clear toll on the company's bottom line.
Data source: Amazon. Chart by author. All figures are in billions of dollars.
The e-commerce giant is responding appropriately, though. It's already begun the process of laying off 18,000 of its 350,000 employees, for example, and has started shuttering some warehouses and distribution centers. Supply chain and logistics consulting firm MWPVL suggests around 70 Amazon facilities have either been closed, postponed, or outright canceled over the course of the past several months.
To this end, also note that $2.7 billion worth of severance costs, as well as property and equipment impairment charges were booked as operating costs last quarter, exaggerating the company's operating losses. Other cost-cutting measures continue to be implemented, too, particularly as they pertain to its retail footprint.
In the meantime, many of the costs that Amazon can't control are also coming down. Gasoline prices should fall from last year's average of $4.05 per gallon to $3.57, according to the United States' Energy Information Administration, taking a healthy bite out of one of the company's biggest expenses. Last quarter's shipping costs of $24.7 billion consumed 16.5% of Amazon's revenue, versus a pre-pandemic percentage of around 14.7%. That difference may seem modest on the surface. When your profit margins are historically paper-thin, however, that tiny gap can be big deal.
More upside than not for Amazon
If you're looking for a heroic profit recovery this year, don't hold your breath. Amazon's still got a lot of cost baggage to deal with. It's also going to take some time for last year's cyclical cost increases to fully be reined in.
Down more than 40% from its late-2021 high, however, Amazon stock is a compelling long-term buy here. The things holding back its bottom-line growth are only temporary headwinds.
