On Friday, shares of Amazon (AMZN 1.49%) declined 8.4%, following the e-commerce and cloud computing leader's release of its fourth-quarter 2022 report Thursday afternoon. Investors were not pleased that the quarter's earnings, as well as guidance for the first quarter of 2023, missed Wall Street's expectations.
In the fourth quarter, Amazon's revenue grew 9% year over year to $149.2 billion, topping the $145.4 billion analyst consensus estimate. Net income was $300 million, or $0.03 per share, down from $14.3 billion, or $1.39 per share, in the year-ago quarter. Wall Street was looking for earnings per share (EPS) of $0.17.
It's important to note, however, that the quarter's results included a pretax valuation loss of $2.3 billion in nonoperating income from the company's stock investment in electric vehicle (EV) maker Rivian Automotive. And the year-ago quarter's results included a pretax valuation gain of $11.8 billion from the Rivian stock.
Earnings releases tell only part of the story. Below are two key things that management shared on Amazon's Q4 earnings call that you should know.
Image source: Amazon.
Holding off expanding mass-market physical grocery stores
From CEO Andy Jassy's remarks:
For what I think is the very best organic physical store experience and selection, we have Whole Foods, which is ... continuing to grow. I really like the progress that business has made on profitability in the last year. ...
I think if you want to have a mass physical store offering, you need a different offering. And that's what we've been working on with Amazon Fresh, and we have a few dozen stores so far. ... [W]e've decided ... we're not going to expand the physical Fresh stores until we have that equation with differentiation and economic value that we like, but we're optimistic that we're going to find that in 2023.
It's not surprising that Amazon seems to be having a challenging time finding a formula for its Fresh stores that meets its internal requirements for profitability potential. The grocery store industry has slim profit margins. Case in point: Kroger, the largest pure-play grocery store by market cap, had a profit margin of 1.6% over the trailing year, according to finviz.com.
But there is a major change coming soon that should improve the profitability picture for the Fresh business as a whole. Like other members of Amazon Prime, I received an email from the company in late January saying:
Starting Feb. 28, 2023, Amazon Fresh delivery orders under $150 will incur a service fee. Prime members will continue to receive free grocery delivery on orders more than $150. Delivery charges will be $3.95 for orders $100-$150, $6.95 for orders $50-$100, and $9.95 for orders under $50.
Currently, Prime members get free delivery for Fresh orders of at least $35 ($50 in New York City). Orders less than $35 incur a $4.99 delivery fee. So the upcoming changes are significant.
For additional context, the Prime Now service charges a flat fee of $9.95 for deliveries from Whole Foods within the standard two-hour window.
Amazon Web Services is facing headwinds, but still has strong long-term growth potential
From CFO Brian Olsavsky's remarks:
[AWS's slowdown in growth is largely] across all industries. There are some points of [particular] weakness ... but by and large, what we're seeing is just an interest and a priority by our customers to get their spend down as they enter an economic downturn. ...
And there [are] things you can do. You can switch to lower-cost products. You can run calculations less frequently. You can do different types of storage on your data. So there [are] ways to alter your cost and your bill in a short period of time.
Amazon's cloud computing business is its profit engine, so it's been critical to the company's success. Its fat profits have enabled the company to enter new businesses and steadily expand its international e-commerce business, which is not profitable in most quarters.
Putting some numbers next to AWS's revenue slowdown and its operating margin contraction: In the fourth quarter of 2022, revenue grew 20% year over year, and operating margin (operating income divided by revenue) was 24.3%. In the third quarter, these metrics were 27% and 26.3%, respectively, and in the fourth quarter of 2022, these numbers were 40% and 29.8%.
Olsavsky said that management expects this growth slowdown to last "at least the next couple of quarters." He added that in January, AWS's revenue increased 15% year over year.
The tough macro environment -- which includes high inflation and interest rates -- will not last forever. AWS still has huge growth potential: 90% to 95% of global information technology (IT) spending goes to on-premises spending, whereas the remaining 5% to 10% is spent on off-site (cloud) computing services, according to Jassy.
