A joke making the rounds is that there are only two things that deeply divided Americans can agree on: freedom and free two-day, or one-day, shipping from e-commerce behemoth Amazon. com. On just about everything else, the country is split 50:50 between Democrats and Republicans who cannot seem to agree on anything.
A recent study of America’s most admired brands listed the US Army and Amazon at the top. America’s favourite online shopping event, Prime Day, starts on July 11.
Last year, the two-day event generated an additional US$12 billion ($16.2 billion) worth of revenues for Amazon. The world’s fifth-largest firm by market value (US$1.3 trillion) could do with higher sales. Its core e-commerce business has struggled since the end of the Covid-19 pandemic, sales growth has slowed dramatically, and its stock is down 32% from its peak in July 2021, though it has rebounded 59% from last November’s lows. In an overbought market dominated by tech stocks, Amazon is the priciest “Big Tech” play, with its shares trading at 75 times earnings for the next 12 months.
Amazon was once the tech stock that investors loved to chase. That mantle passed to electric vehicle pioneer Tesla, then to meme stocks such as Game Stop and, more recently, to Nvidia, the AI chipmaker. The irony is that both Nvidia and Tesla are growing revenues faster than Amazon, and their stocks, while expensive relative to the rest of the market, are cheaper than Amazon’s.
Over the last five years, Amazon’s stock has underperformed its mega-cap peers by 53% despite revenues growing by a CAGR of 24% and operating income by 24%, notes Mark Shmulik, analyst for Bernstein & Co. Its cloud service business Amazon Web Service (AWS) is now five times bigger and advertising on its platform went from almost nothing to US$38 billion in annual revenues.
Back to its roots
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Shmulik, who recently wrote an “open letter” to CEO Andy Jassy and Amazon’s board, argues that “it’s time to refocus capital, retake the narrative, and get back to ‘Day One’ for Amazon.” ‘Day One’ is a reference to founder Jeff Bezos’ original 1997 shareholders letter outlining the key measures of the firm’s potential success: a relentless focus on customers, creating long-term value over short-term corporate profit, and making many bold bets. “This is Day 1 for the internet,” and for Amazon, Bezos wrote. “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death,” he noted.
“Day One” is also code for inventing like a startup, with little regard for legacy. By refocusing on its founder’s “Day One” mantra, Amazon can once again become the great company and the beloved stock that it once was, the Bernstein analyst argues.
To understand the e-commerce behemoth, look no further than its profit machine, AWS. Developed in the aftermath of the tech bubble burst in 2000 when Amazon was on the verge of bankruptcy, AWS has grown to become by far the world’s largest cloud infrastructure service or outsourced data centres that companies around world use for their computing, storage and database needs. Large enterprises rent cloud servers from AWS, Microsoft’s Azure and Google Cloud. AWS is twice the size of Azure. Unlike its low-margin e-commerce business which is losing money, AWS is hugely profitable and, over the past decade, helped subsidise Amazon’s other ventures.
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But growth at AWS is slowing. AWS sales grew 16% to US$21.4 billion in the January-March quarter, slowing from 37% growth in the year-earlier period — a far cry from 50%+ growth three years ago. Companies buy processing power and data storage from cloud services providers such as AWS by the hour, week, month or year. When economies turn, they can decrease their cloud spending to save expenses. Just as growth in cloud services has slowed, investors have been enamoured of the promise of generative AI.
Not surprisingly, then, Amazon’s focus has been on cost-cutting. It has laid off 27,000 people over the past six months. The firm went on a hiring binge during the pandemic, doubling its global workforce from 798,000 in December 2019 to over 1.6 million by end-2021. At the end of the pandemic, as people went out to physical stores, they increasingly bought less online. E-commerce is now estimated to reach 24% of total US retail sales by 2026, up from 21% in 2022, or 6% annual growth compared to 11% previously forecast.
Starting out as an online bookstore in 1994, Amazon morphed into an “everything store” selling anything to anyone who wanted it anywhere on earth online. It was the most feared disrupter in the internet era. Now, it is locking horns in a fierce struggle with physical rivals such as Walmart — which is increasingly encroaching on its digital turf — for a bigger share of America’s and the world’s wallets.
Amazon has a huge 37.8% share of the US e-commerce business whereas Walmart, the world’s top retailer, has just 3.9% of the US online market. But Walmart has a 25% share of the US physical grocery market versus Amazon’s Whole Foods’ less than 2% share. Both are in the grocery business, where margins are notoriously thin. Retailers want to be in that business because everyone buys groceries and, once customers are in the store, you can sell them anything, including higher-margin stuff.
Ironically, Walmart was once retailing’s Amazon-like disrupter. In the 1970s and 1980s, it built a huge network of stores in suburbs across North America, decimating downtown retailers. It used technology to more effectively monitor inventory, purchasing and sales, delivering “everyday low prices” to lure shoppers. Then, it met its match with the rise of Amazon.
Walmart has been obsessed with catching up with Amazon for over a decade. To pivot from a physical retailer to a provider of an omnichannel shopping experience, Walmart has embraced e-commerce. To win over Walmart’s touch-and-feel customers, Amazon launched Amazon Fresh as well as other retail stores and, in 2017, it splurged US$3 billion to buy Whole Foods. Its foray into physical retailing hasn’t gone as well as Amazon had hoped.
Recurring revenue model
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The key to its retailing business is its controversial and hugely successful loyalty programme, Amazon Prime, whose members qualify for free speedy shipping as well as free PrimeVideo, which competes with paid streaming services such as Netflix. It costs US$139 per year or US$14.99 a month to join Amazon Prime. There are 240 million Prime customers globally, of which more than 160 million are in the US. Prime has grown from a US$4.5 billion segment in 2015 to US$35 billion last year. Prime is a very sticky platform with a high 93% retention rate after the first year. More than 68% of people who buy things on Amazon have a Prime account. Ironically, Amazon copied the recurring revenue bundle from Costco, a longtime Walmart rival.
The US Federal Trade Commission (FTC) believes Amazon duped millions of customers into enrolling with Prime without consent and deliberately made it too difficult for them to opt out of the service. Last week, it filed a suit alleging that Amazon used “manipulative and deceptive user-interface designs to deceive consumers”.
While signing up for Prime is a straightforward task, usually taking a click or two, “Amazon tricked and trapped people into recurring subscriptions without their consent, not only frustrating users but also costing them significant money,” FTC chair Lina Khan said. Amazon, FTC complaint says, has set up a “four-page, six-click, 15-option process to stop paying for the service”. Amazon denies it has broken any laws by making the process of unsubscribing from its subscription service so complicated.
FTC recently settled a privacy lawsuit against Amazon with allegations related to kids’ Alexa voice recordings and another with allegations that Amazon’s Ring division invaded users’ privacy by “allowing thousands of employees and contractors to watch video recordings of customers’ private spaces”. FTC is expected to file a bigger anti-trust case focused on Amazon’s core online marketplace alleging that it is leveraging its power to reward online merchants that use its logistics services” and punish those who don’t.
Amazon is pursuing far too many ideas, “with weaker ideas taking away the oxygen, capital and, most importantly, focus from the truly disruptive initiatives that ‘only Amazon’ can do,” Bernstein’s Shmulik says. Many of the high-profile initiatives that it has been pursuing are relics of the zero- interest rate era which have no place in the current environment as investors are now focused on profitability.
Shmulik notes that many of the areas that the company has ventured into in recent years are simply too broad — across healthcare; internet connectivity such as Project Kuiper; personal assistants such as Amazon Echo; and physical retail such as Whole Foods and Amazon Fresh. Shmulik argues that like Google, which culled many of its long-term bets or moonshots, “it may be time to narrow investment budgets and pull forward project target timelines and milestones.” Amazon’s hardware business, which includes Fire Tablets and Alexa-powered Echo, lost US$10 billion last year. Amazon abandoned its iPhone rival, Fire phones, months after they were first released in 2014.
Right now, the company is pouring the most money into the healthcare sector, which makes up 18.3% of US GDP. Shmulik says Amazon should consider “divesting, seeking outside funding or trimming spending” in healthcare initiatives and Project Kuiper which seeks to improve global broadband access through a constellation of low earth orbit satellites. It has shut down several healthcare ventures after years of trying to build a viable business. Amazon paid US$750 million to buy online pharmacy Pill Pack. Last year, it paid US$4 billion to buy One Medical, an American chain of 200 clinics. Amazon is just “throwing a bunch of stuff at the healthcare wall and seeing what sticks rather than approaching the opportunity from a capability and competitive advantage perspective,” he says.
Amazon has also lost a ton of money in overseas e-commerce falling behind clones like Mercado Libre in Latin America, South Korea’s Coupang, SEA’s Shopee in Southeast Asia, and Jumia Technologies in Africa. Perhaps it is time for Amazon to quit markets where it has a small share and no clarity on profitability. Why does Amazon want to do business in Singapore where it has a tiny 11% market share? Even in India, where it is bleeding money after years of investments, Amazon should look at its options. “Is it worth continuing to fight for second or even third place in a foreign market with no discernible competitive advantage?” Shmulik asks.
Despite growing investor scepticism, Amazon remains the world’s largest cloud infrastructure firm, a formidable global e-commerce player and a distant No. 3 advertising player behind Google and Facebook. The AWS bet was a lucky strike in a zero interest rate era but, in a higher-for-longer interest rate world, capital is at a premium.
Markets are unlikely to be as patient with big audacious moonshot bets as they were when AWS was being hatched. Innovative firms these days can churn out new products and services at warp speed as cloud computing and AI become ubiquitous.
Companies that don’t act like it’s always “Day One” do so at their own peril. Amazon lags behind its large-cap peers in AI. The firm’s culture serves as a headwind to acquiring AI thought leaders, which is seen as a hurdle to being successful in AI. Instead of making riskier bets, Amazon might want to pivot back to Day One, look at generative AI and hire the top AI talent to transform itself and change the narrative.
Assif Shameen is a tech and business writer who is based in North America
