Amazon (AMZN +1.10%) is looking to return to operating income growth in 2023 after its bottom line shrank by half last year.
Its retail business generated over $10 billion in operating losses last year as management worked to get costs under control. The impacts of those cost-cutting measures started to peek through in Amazon's early 2023 earnings results, but the company continues to look for ways to push profits higher.
Several recent moves show that Amazon is increasingly focused on profit growth, even more so than on growing its top line, which has historically been a major point of emphasis. Here's what investors should know.
From big spending to big profits
Amazon's spent the last few years spending heavily to grow the business across several areas, but now, it's looking to transform those investments into profit drivers. Its biggest investment over the last few years was in its fulfillment network. The network's footprint doubled in size from the end of 2019 through the end of 2021. Amazon continued investing in logistics in 2022, but will pull back on those outlays significantly in 2023.
Importantly, management is now focused on how to make the most of that massive logistics network. CEO Andy Jassy said the company had reorganized its network using a regional model that divides the U.S. into eight interconnected regions, and it's starting to realize much greater efficiencies. Less spending and more efficient utilization of its assets should provide a massive boost to profits.
Amazon's also picking some low-hanging fruit in other areas.
For example, it's looking to license its older original programming from Prime Video to other video streaming services. That's a tactic numerous media companies have been using as they look for ways to make their businesses more profitable amid the consumer shift from linear television to streaming. Amazon will license content through a newly created unit, Amazon MGM Studios Distribution, taking advantage of its 2021 movie studio acquisition.
Amazon's also hitting the pause button on its Amazon Fresh grocery store plans. Its Amazon-branded brick-and-mortar supermarket plans haven't come together, but online food sales and Whole Foods continue to grow. It's going to sublease some locations in order to offset the costs it's incurred.
Amazon is focused on getting more out of the assets it has acquired over the last few years. The combined impact on the bottom line should be noticeable.
NASDAQ: AMZN
Key Data Points
Surviving a cloud computing growth slowdown
The bigger focus on profitability comes as management warned of a significant slowdown in growth for its biggest source of profits: Amazon Web Services (AWS).
Management warned that the cloud computing unit's revenue growth will slow to just 11% year over year in the second quarter, after growing just 16% in the first quarter. The company noted it's working to help businesses optimize their cloud computing spending. That means Amazon will generate less revenue per quarter, but increase its chances of keeping its customers for longer. That trade-off is in line with the classic long-term thinking investors have come to expect from Amazon.
It's worth noting, Amazon doesn't plan to cut back its own spending on AWS. It'll continue to build more data centers and develop hardware and software to support artificial intelligence systems.
As a result, operating income from AWS might not grow as quickly as investors are used to. Offsetting that is a sharper focus on profits from the retail operations. After a year of huge losses from the retail business, Amazon looks poised to return to strong operating profit growth despite the potential drag from AWS.
As its operating margin expands, the stock should trade at a higher EV/EBITDA multiple. And while it has come off its lows, it still trades below pre-pandemic levels by that metric.
