Here's the Most Shocking Thing About Amazon's Earnings Report

It can be challenging to assess the business of Amazon (AMZN 3.20%), as it has so many moving parts. The sprawling conglomerate can be broken up essentially into three segments, though: Amazon Web Services (AWS), e-commerce, and new ventures. Of course, within e-commerce, there are a number of subsegments, from first- and third-party sales to Prime video, physical stores, and advertising.

Investors were initially exuberant after Amazon reported a revenue and earnings beat in the first quarter, along with solid second-quarter guidance. However, those gains reversed to losses, as CFO Brian Olsavsky noted AWS growth had further decelerated by five percentage points in April relative to the first quarter.

However, the stock's reversal seems overdone if one maintains a positive long-term vision of cloud computing. Moreover, the fixation on AWS may distract others from the significant improvements in the e-commerce business.

In fact, the company's turnaround in e-commerce was really impressive. In a surprising twist, it's possible the retail business could even become higher-growth and more profitable than AWS in the near future.

Oh, how times have changed

Just one year ago, it was the e-commerce business that was left for dead, while the AWS segment was seen as Amazon's savior. Now, that seems to have reversed.

CEO Andy Jassy set about streamlining and improving the retail business last year amid 2022 struggles coming off the pandemic. He's made impressive improvements. That, however, has coincided with AWS's slowdown, as Amazon helps customers optimize their cloud spend in these cautious economic times. Look at how the different segments have gone in opposite directions over the past year.

Data source: Amazon Q1 2023 press release. Growth figures are in constant currency.

You can see the big slowdown in AWS, from 37% to 16% growth. And that appears to be continuing, with management noting an 11% year-over-year growth in April.

However, online stores, third-party sellers, and subscription services, which make up the core of Amazon's e-commerce business, all reaccelerated. And the advertising segment, the final component of the e-commerce business, only decelerated by two percentage points, from 25% to 23% -- also very solid performance. That's especially true as the advertising segment is now quite large, with $30 billion in revenue over the past four quarters.

It appears as though customers are flocking back to Amazon's retail business for its quicker delivery times, deep selection, and low prices. Also, management flagged newer subsegments such as business-to-business delivery, international growth, grocery, and Buy with Prime (whereby Prime customers can order with their Prime account at third-party websites) as growth drivers.

Profits are inflecting upward, too

Even more impressively, the retail growth is happening as Amazon streamlines costs, leading to upward momentum in profitability.

While Amazon's perpetual investments in new businesses like healthcare and low-orbit satellite internet makes the true operating margin of the retail business hard to figure, the company does disclose some underlying metrics, which are now turning positive.

One metric I tend to look at is shipping cost growth versus the growth in paid units, which shows how efficiently the company is delivering packages. On this metric, Amazon saw the third quarter in a row of paid units growth at a higher level than shipping cost growth:

Data source: Amazon Q1 2023 release.

You can see the positive momentum here, as the company has impressively capped shipping cost growth, widening the spread with units growth, paving the way for upward-inflecting operating income. Clearly, all the work Amazon has done trimming its employee count while rationalizing and reorganizing its fulfillment and distribution footprint is bearing fruit. And of course, lower oil and gas prices are helping, too.

Investor takeaway

One year ago, Amazon Web Services was Amazon's highest-growth and most profitable business, but the retail business was struggling. But as AWS's growth decelerated and margins compressed, management has been able to reignite profitable growth in e-commerce.

The bodes well for Amazon generally and potentially for an AWS rebound, as management under Jassy has shown the ability to tackle big challenges and reaccelerate performance amid tough economic conditions.

Overcoming significant obstacles has happened many times over Amazon's corporate life, especially during the dot-com bust and 2008 mortgage meltdown, but sometimes shareholders need a reminder of the company's resilience, especially in the post-Jeff Bezos era. With the stock still down 44.3% from its all-time highs, Amazon remains attractive for long-term investors today.