Why Amazon's International E-Commerce Segment Has Long-Term Growth Potential

When people discuss Amazon's (AMZN 0.58%) growth opportunities, they often talk about its cloud-operation Amazon Web Services (AWS) or the North American e-commerce operation. Some even talk about the opportunity in advertising, but people rarely mention the international e-commerce segment as a significant growth opportunity.

Considering that the international segment's fourth-quarter 2022 revenue shrunk by 7.5% year over year, producing $2.2 billion in operating losses, you might think Amazon's international piece is not worth considering. Instead, however, investors should pay more attention to its global e-commerce business. Here's why.

Near-term challenges for its international e-commerce segment

Management blamed most of its international segment operating loss in 2022 on increased fulfillment and shipping costs.

Part of the fulfillment-cost increase is due to inflation's effect on wages, transportation, and technology costs. While the U.S. market has similar problems with these costs, Europe is far worse. For instance, the war between Russia and Ukraine has been particularly disruptive, creating higher energy prices and higher inflation than in most places worldwide -- a gut punch to Amazon's European operations, and Europe is a big part of its international segment.

Inflation and the Ukraine situation have impacted not only Amazon's European operations profitability but also revenue growth, as European consumers are reluctant to spend. As long as some of these macroeconomic issues linger, they could negatively impact the international e-commerce segment's profitability compared to the North American market.

Another issue is that its international division is at an earlier investment stage than the U.S. It takes a certain amount of fixed investment in supply chain tools, robotics, and other technology that Amazon needs to make when it enters a new country before the company drives enough revenue to cover those fixed expenses and begin to make a profit. So, investors failing to see immediate results from Amazon's international investments often discount the segment's importance.

Lastly, the international segment requires Amazon to follow the different regulations of all the countries it decides to enter. As a result, it sometimes has to adjust its business in ways very different from how it operates in the North American market. For example, Amazon's India operation had to reinvent the e-commerce operation from the one used in North America due to the rural nature of most of India, the use of cash payments by most consumers, and the country's extensive system of mom and pop stores whose owners feared Amazon might put them out of business.

In other locations, like Europe, it had to make extensive changes due to antitrust litigation. Some of the changes caused a loss of the company's North American e-commerce advantages in the European market. As a result, international markets often have additional hurdles or costs than the U.S. market.

It can produce excellent growth and profitability

Its international business has the reputation of being a ne'er-do-well unit. But when the economy was roaring in the first quarter of 2021, the international segment grew sales at 60% year over year compared to the North American segment's 40% growth. In addition, international produced $1.3 billion in operating income. So, in a normalized economy, Amazon's international portion can create outsized revenue growth and profits.

During the Q4 2022 earnings call, management highlighted how its compounded annual growth rate (CAGR) from 2019 to 2021 in several mature countries was outstanding. For example, the countries it highlighted were the U.K., which grew at over 30%; Germany at 26%; and Japan at 21%. The best part, those countries maintained those revenue gains and continued to grow modestly in this terrible economic environment. According to Amazon's Chief Executive Officer Andy Jassy, "A meaningful amount of market segment share has shifted to our global established e-commerce territories." He also indicated that all the international territories are on a similar growth and profitability trajectory as the North American segment and should grow into a sizable, profitable e-commerce business.

The international expansion continues

Suppose you listen carefully to all of Amazon's earnings calls. In that case, you may be aware that management talked last year in the first quarter of 2022 about building too much capacity for the demand that didn't appear in the North American markets, and it is now in cost-control mode instead of investment mode. So today, instead of investing heavily in the North American e-commerce segment, if you believe rumors from Business Insider, which claims to have access to leaked documents, international e-commerce is the unit in investment and growth mode.

As of 2022, Amazon operated marketplaces in 20 countries, but that number is about to grow. Amazon plans to open new operations in five countries: Belgium, Chile, Colombia, Nigeria, and South Africa in 2023.

Although the North American market still has plenty of growth left, it is becoming evident by where management directs its new investments that the international segment will eventually take over as the company's new e-commerce growth engine, and investors should pay attention.