Amazon (AMZN 0.64%) stock was outpacing the market on Thursday and Friday of last week, following the release of CEO Andy Jassy's shareholder letter Thursday morning.
Amazon's stock still sits 45% below its all-time highs, hounded by a number of concerns, from the profitability of its retail business, to a slowdown in Amazon Web Services, to whether it will be left behind by emerging generative AI chatbots like ChatGPT.
In the letter, Jassy took direct aim at these concerns and gave specifics as to how Amazon doesn't just intend to allay those fears, but be very successful on each of those fronts.
Yes, the retail business will be profitable
Some are wondering if Amazon's core e-commerce business will ever make serious profits. Amazon usually spends all retail gross margins on new growth, so retail margins have been close to zero for much of Amazon's corporate life.
The retail business did flip to some profitability during the pandemic, only to flip again to operating losses last year as growth slowed and inflationary costs surged. In 2022, the North American segment lost $2.8 billion, and Amazon's international segment lost $7.7 billion.
Yet in Jassy's letter last week, he sees the retail business getting "meaningfully larger" over time with "healthy operating margins."
But this wasn't just a promise; Jassy also outlined concrete steps Amazon has taken to make it a reality. Over the past few years, Amazon has redesigned "scores of processes and mechanisms" since Amazon effectively doubled the size of its sortation and last-mile delivery network during the pandemic.
One key change has been moving from a national fulfillment network, with inventory spread all over the country, to a regional network consisting of eight smaller regions. These regions are now largely self-sufficient, and Amazon has also developed machine learning algorithms to anticipate what inventory each region will need at the right time. Keeping inventory closer to customers means shorter distances to travel and importantly, lower costs.
Obviously, sometimes a customer will order something that needs to be shipped from another region, but overall, the new system appears to be yielding results. Jassy noted that the company will have its fastest-ever Prime delivery speeds in 2023.
Investors may have already noted some improvement on these fronts over the last couple of quarters. Delving into its recent disclosures, Amazon's shipping costs have grown at a lower rate than the number of items shipped over the past two quarters. That's a stark change from the pandemic, when shipping cost growth regularly outpaced units growth, even when unit shipments were much higher.
If that trend continues, look for Amazon's retail businesses to become profitable sooner than you may think.
Image source: Getty Images.
Will Amazon get left behind in generative AI?
Another concern on the part of investors is if Amazon will get left behind in the new age of generative artificial intelligence, with the advent of OpenAI's ChatGPT last November. ChatGPT is of course partially owned by Amazon rival Microsoft, and other attention has gone toward Alphabet's ChatGPT rival Bard in recent weeks.
With all the attention going to Amazon's top two rivals, some may have wondered if Amazon's relative silence on generative AI meant the company was falling behind. But Jassy took this opportunity to dispel those notions.
In fact, Jassy said Amazon has been "investing heavily" in its own large language models and generative AI for years. But as opposed to a general AI, which can be extremely expensive to train and deploy at scale, Amazon appears to be developing large language models for its AWS customers and e-commerce sellers. In other words, Amazon is looking to how these new AI capabilities will actually help specific end-users.
In a separate blog post on the same day Jassy's letter was released, AWS VP of databases and analytics Swami Sivasubramanian introduced a new tool called Amazon Bedrock. Bedrock allows AWS customers to combine their own proprietary data with foundational large language models, or FMs, constructed either by Amazon or three other AWS start-ups -- AI21 Labs, Anthropic, Stability AI -- via easy-to-use APIs.
And in true Amazon fashion, Amazon looks to be the low-cost provider of large language models as well. Jassy claims low-cost AI has been enabled by Amazon's purpose-built in-house chips Trainium, introduced just last year, and Inferentia, first introduced in 2019. In the letter, Jassy claimed its machine-learning model training instances using Trainium are, "up to 140% faster than GPU-based instances at up to 70% lower cost," and that inference using the latest second-generation Inferentia2 chips, which were just introduced, were four times faster with 10 times lower latency than the prior generation. Jassy also said Amazon itself had saved over a hundred million dollars in capital expense from its own AI deployment since late 2019.
The bottom line is that AI has the capability to transform how business is done, but computing and energy needs can be expensive. With its low-cost ethos and in-house chips, Jassy said customers will be able to, "get a lot more done with AWS's training and inference chips at a significantly lower cost."
The main takeaway is that Amazon isn't sleeping on the generative AI front; in fact, it is taking strides to lead this emerging industry.
AWS will have "unusual growth" over the long term
A final concern about Amazon of late has been the recent drop-off in AWS' growth rate. Last quarter, AWS' top line decelerated to 20%, down from 28% in the prior quarter and 40% in the year-ago quarter. The segment's operating margins also fell to 24.3%, down from a high of 35.3% in the first quarter of 2022. Moreover, management guided for more of a slowdown in the first quarter, as Amazon continues to help clients optimize costs.
Jassy maintains Amazon continues to help its customers optimize and save money in the near term, but also claims that this is only in preparation for much more cloud-based deployments in the future, writing:
We're trying to build customer relationships (and a business) that outlast all of us; and as a result, our AWS sales and support teams are spending much of their time helping customers optimize their AWS spend so they can better weather this uncertain economy. Many of these AWS customers tell us that they're not cost-cutting as much as cost-optimizing so they can take their resources and apply them to emerging and inventive new customer experiences they're planning. Customers have appreciated this customer-focused, long-term approach, and we think it'll bode well for both customers and AWS.
Some have been wondering if the recent deceleration means the cloud computing migration is in its later innings, but Jassy doesn't believe that to be the case. Jassy maintains AWS is still seeing a "robust" new customer pipeline and customer migrations. So while existing customers are trying to save on their computing costs and use less resources, Jassy makes the case that more new enterprises are migrating to the cloud in these lean economic times instead of investing in and managing their own data centers.
Jassy reiterated that only 10% of global IT spending is in the cloud, and that cloud-based computing will eventually make up the majority of that spend. "AWS is still in the early stages of its evolution, and has a chance for unusual growth in the next decade," he wrote.
Amazon has been doubted before
It may seem crazy now, but many years ago, investors were skeptical of Amazon expanding from selling books online to other types of goods. Many were also skeptical cloud computing would ever become a real business. Those doubts usually came to the surface during times of economic stress, such the aftermath of the dot-com crash and the Great Recession of 2008.
Yet despite its very successful long-term track record, investors are now skeptical of Amazon once again. But they shouldn't dismiss Jassy's optimistic take. In addition to a bounce-back in its core businesses, and with new growth ventures in both healthcare and satellite broadband in the pipeline, I think it's more likely than not Amazon's got lots of profitable growth ahead of it.
With the stock still down 45% from its highs, Amazon stock remains a promising long-term bet.
