To put it lightly, the technology sector is going through a rough patch at the moment. Tough economic conditions have slowed down companies' growth rates over the last 18 months, which means they've had to carefully manage costs. That, unfortunately, has led to mass layoffs across the industry.
According to Layoffs.fyi, the tech sector slashed 161,411 jobs in 2022. But 2023 could be even worse, because over 139,000 tech workers have been laid off already -- and it's only March.
E-commerce giant Amazon (AMZN -1.14%) is among the organizations slimming down, after growing its workforce from 798,000 at the end of 2019 to 1.54 million by the end of 2022. It announced it would eliminate 18,000 jobs in January, and today, it revealed a further 9,000 cuts.
While the latest round of cuts seems like a small number compared to the size of its overall workforce, it's where Amazon has made these cuts that might be concerning to investors.
Image source: Getty Images.
On the chopping block: Amazon Web Services and advertising
This round of layoffs will be concentrated across four of Amazon's departments: Amazon Web Services (AWS), advertising, PXT Solutions (People Experience and Technology Solutions), and Twitch. The first two are perhaps the most surprising, because they've recently been the primary drivers of growth for the entire company.
AWS is Amazon's industry-leading cloud services segment. It helps its business customers with their digital transformations by offering hundreds of solutions, from simple data storage to advanced machine learning applications. It's also Amazon's main source of operating profit.
But its revenue grew by just 20% in the fourth quarter of 2022, which was not only a slower rate than both its key rivals Microsoft Azure and Alphabet's Google Cloud, but it was also half the growth rate it achieved in the year-ago period. The job cuts at AWS suggest perhaps the company is preparing for even slower growth in upcoming quarters, so it's managing costs to maintain profitability.
On the advertising front, that segment has continued to show steady growth with a 23% revenue increase in the fourth quarter, even in the face of this tough economy. It's possible job cuts in this department are targeted toward experimental projects or those that aren't expanding as quickly overall.
In any case, advertising remains one of the more promising segments of Amazon's business. The flagship Amazon.com website attracts 2.2 billion visits a month, so it's an ideal place for merchants to market their products.
Plus, the company has a growing portfolio of media assets that could attract an increasing amount of advertising dollars. Streaming is one major opportunity, especially since Amazon continues to accumulate the rights to live sports -- from the NFL in the U.S. to major soccer leagues across Europe.
What the job cuts mean for Amazon stock
Amazon CEO Andy Jassy said the recent layoffs were part of a plan to make the company leaner, while still being able to invest in the areas of its business that will improve customers' lives, as well as Amazon as a whole.
Put simply, in this economic environment, any move that will make Amazon more profitable will likely be well received by investors, especially after the company delivered its first annual net loss since 2014 last year (although under extenuating circumstances). Cutting costs in the form of layoffs will likely move the company forward on that front.
But Amazon is still very much an e-commerce company. Online sales accounted for $220 billion of its $513 billion in total revenue last year, and with consumers struggling right now, that's not the best place to be. It's one reason Amazon stock has plunged 47% from its all-time high amid the broader tech sell-off, and a few layoffs may not be enough to alleviate those external challenges.
Some investors might also be concerned about what they could mean for the performance of Amazon's fastest-growing segments like AWS and advertising in its upcoming quarters. For that reason, while I'm very bullish on Amazon's prospects over the long term, investors sitting on the sidelines might feel inclined to seek further clarity in Amazon's next quarterly report before making a decision to buy in.
