Even well-established corporations aren't immune to economic troubles. Just ask Amazon (AMZN 1.39%), one of the largest companies in the world by market cap. Over the past year, the e-commerce leader has seen slower sales growth, a rare annual net loss, and a stock price that dropped by about 50% in 2022.
Amazon has responded to these issues by attempting to reduce expenses where it can, including letting go of thousands of employees, a popular move on Wall Street these days. And on March 20, Amazon announced another round of job cuts that has some investors worried. What does all this mean for the company's future?
Let's consider the good, the bad, and the ugly of Amazon's layoffs from a business and investing perspective.
NASDAQ: AMZN
Key Data Points
The good: Increased profitability on the way?
After reporting a net loss in 2022, Amazon needs to make sure that doesn't happen again this year. Although it's tough to call layoffs a "good" thing from a personal perspective, from a business standpoint, Amazon's layoffs should prove helpful for the company in the long run. After all, the company's ongoing layoffs are ultimately part of a larger initiative to streamline its costs and boost profitability.
Even though Amazon's business looks like it is in trouble right now, the company will almost certainly be able to weather the storm thanks to efforts to reduce expenses and also improve the overall strength of its business.
The bad: Did Amazon make a strategic mistake?
In September 2021, Amazon announced plans to hire 125,000 workers across multiple cities and states in the U.S. About a year later, the company's executives disclosed it had instituted a hiring freeze for their corporate workforce, highlighting that they had already implemented a similar measure in other departments.
Since then, Amazon has announced layoffs on multiple occasions that have affected a total of at least 27,000 workers. So to state the obvious, Amazon has drastically changed its tune on this matter over the past year and a half. What gives? Here's one plausible answer: Companies expand their workforce and their broader operations in anticipation of growth.
Amazon's business soared through the roof in the early days of the pandemic as did that of other e-commerce specialists. How could it not? People being stuck at home had little choice but to shop online, at least more than they otherwise would have. The tech giant benefited from this shift. And Amazon assumed this tailwind would last longer and planned accordingly by hiring more people, among other things.
However, once customers were free to go out again, this dynamic changed. Furthermore, the economic troubles we faced last year (inflation, supply chain issues, etc.) made things even worse and led to investors reining in their spending. Amazon couldn't have predicted all these headwinds. Still, the company's projections regarding how its business would be performing right now were probably far off the mark.
Otherwise, there would be no need to make the adjustments Amazon is implementing.
The ugly: The latest job cuts affect Amazon's cloud business
Amazon's latest announced round of layoffs was particularly noteworthy since these layoffs will affect, among other segments, Amazon Web Services (AWS). That's Amazon's cloud-computing unit that happens to be its most profitable business. Last year, AWS was responsible for all of Amazon's operating income. That is, the company's two other segments failed to be profitable on an operating basis.
However, AWS still showed some cracks, with slower revenue growth than expected in the fourth quarter. Amazon's decision to decrease its workforce within AWS is a clue that this segment may not fully rebound this year. This could be concerning for some investors considering how important cloud computing is to Amazon's future.
Is Amazon stock still a buy?
Although Amazon's recent layoffs paint an ugly picture, the longer-term case for Amazon's stock remains intact. This is especially true considering the company's continued dominance in e-commerce, cloud computing, and online advertising, all of which represent major long-term opportunities once economic issues subside. With that said, Amazon stock is still a buy for investors who are looking beyond the next 12 months.
