Despite Amazon’s strong growth in the past couple years, Amazon stock forecasts suggest that the company’s spending will decrease in the coming years. The company has recently made a large investment in EV manufacturer Rivian, which has proven to be a risky bet.
Amazon's profitability and operating income outlook
Despite the high expectations of Wall Street, Amazon’s profitability and operating income outlook fell short of analysts’ estimates. Amazon said it was facing high inflation, a difficult economic climate, and changes in consumer shopping habits. It also faced challenges in its e-commerce business and its cloud computing business. During the quarter, Amazon’s international-segment operation loss widened to $2.5 billion. Amazon also warned that growth could fall to its lowest level in more than a decade.
Amazon’s profitability and operating income outlook for the fourth quarter was below Wall Street’s expectations. Analysts were looking for $5.3 billion in operating income. Amazon’s revenue for the quarter came in below expectations at $127.1 billion.
Amazon’s profitability and operating income is primarily driven by the company’s high margin Amazon Web Services cloud computing business. Its AWS cloud business generated $20.5 billion in revenue during the quarter, nearly double the amount reported a year ago. The company’s AWS operating margin dropped to 29% from 35.3% in the first quarter of 2018.
Amazon’s AWS revenue grew 37% year-over-year, largely due to new customer commitments. The company’s AWS business accounted for 63.3% of total operating income during the third quarter. The company’s advertising business grew 25%. The advertising business accounted for 9.5 billion of the company’s total sales.
Amazon has a large workforce of warehouse workers and logistics operations. Its fulfillment network is critical to its business. It is also becoming more expensive to operate. It is increasing the cost of shipping items to consumers, especially during the holiday season. In addition, trucking capacity is becoming scarcer. It also pays higher electricity rates in its data centers.
Amazon is focusing on cutting costs. Chief Executive Officer Andy Jassy has accelerated the company’s cost reduction efforts. He has also slowed plans to open new warehouses.
Amazon’s profitability and operating income forecast for the fourth quarter came in 4% below analysts’ expectations. Amazon’s profitability and operating income outlook for 2021 was at the low end of expectations, though it still expects to generate significantly more operating income in 2023.
Amazon’s profitability and operating income expectations for the fourth quarter come as the company faces higher costs to operate its e-commerce business and cloud computing business. It also is facing changes in shopping habits after the coronavirus pandemic.
Amazon's spending will decline after two years of significant growth
Despite an aggressive growth plan and huge investments in the last two years, Amazon’s spending is set to slow down significantly over the coming year. That’s according to Amazon’s Chief Financial Officer, Brian Olsavsky, who said the company is bracing for slower economic growth.
Amazon’s spending is being cut in several areas, including a reduction in the size of its Grand Challenge skunkworks lab. It also announced that it would cut the number of call centers in the U.S. by 99,000. In addition, Amazon is closing some of its new warehouse locations.
Amazon has aggressively spent on R&D in recent years. It spent $60 billion on research and development last year. The company spent nearly twice as much as Google, Microsoft and Apple combined. Amazon is also investing heavily in logistics and shipping. In the third quarter, it spent $19.9 billion on shipping.
Amazon is also investing in cloud services. The company’s cloud sales grew 28% in the July-September period. In addition, Amazon is acquiring a Belgian warehouse robotics company. The acquisition is for an undisclosed amount.
Amazon’s R&D spending is growing more aggressively than the average company. But it’s also cutting into short-term earnings. In the third quarter, Amazon’s operating income dipped. It also spent more than twice as much on R&D as Alphabet’s (GOOGL.O) Google and Microsoft.
Amazon will continue to invest aggressively in new projects, but it may cut back on some of its older initiatives. Amazon will also continue to invest in early-stage businesses. It will leverage its data and analytics to create more value for customers. This will help widen its competitive moat.
Amazon also announced plans to acquire a primary care provider, One Medical, for $3.9 billion. The company also agreed to buy a robotics company, iRobot, for $1.7 billion. It’s unclear what other projects Amazon has in the works.
Amazon’s revenue is growing at a faster pace than its international counterparts. Its revenues represent a greater percentage of the country’s GDP than other countries. In fact, Amazon’s revenues are increasing faster than those of the United Kingdom, Japan, Germany and France.
Amazon's resilience to Amazon Prime
During the course of the second quarter, Amazon delivered robust results that restored investors’ confidence in the company’s bullish narrative. Amazon’s sales in the second quarter exceeded the top range of management’s guidance and its operating income also beat expectations. Its shares rose as much as 14% in late trading.
While sales and operating income were the main event for Amazon’s second quarter, the company’s results also included a few idiosyncratic metrics that are worth considering. Specifically, the company invested in a company called Resilient Power and made a second round of funding for the ultra-low carbon fuels developer Infinium. It also reshaped its technology to improve customer service and supply chain efficiency.
The company is also using machine learning and chaos engineering to improve its DevOps processes. It has also invested in an Italian company called CMC Machinery, which customizes box sizes for delivered items.
Amazon’s supply chain also improved with minimal system downtime. It also continued its commitment to free shipping. However, it is still facing intense pressures from labor and supply chain labor costs. Inefficient productivity and inflationary pressures are weighing on its margins.
Amazon has also demonstrated resilience in slowing down the consumer end of the market. Prime Video’s resilience and chaos engineering team is also experimenting with team resilience scores. They are aligning around the idea of resiliency and working to improve the DevOps processes that facilitate rapid deployment of new content.
It’s worth mentioning that Amazon’s second quarter results also included a $3.9 billion negative impact from non-operating losses. That was a small fraction of the company’s total expenses, which totaled $4 billion. That’s not an unusual occurrence, but it’s still worth noting.
The company also rolled out a two-week free trial of Amazon Prime. The company’s free shipping policy remains a primary preference among consumers. As a result, Prime will likely benefit in the near term from robust demand. It’s also worth noting that Prime accounted for about 57% of all merchandise sold on Amazon in the second quarter.
It’s also worth noting that Amazon has already demonstrated the best of the best in the е-commerce space, namely its Prime Video offerings.
Amazon's recent investment in EV manufacturer Rivian proved to be a questionable bet
EV manufacturer Rivian Automotive announced an investment from Amazon last year. Amazon owns 18.1% of the company and aims to have a piece of the electric vehicle pie. Rivian has plans to build two all-electric models, a pickup truck and SUV. The truck uses a dedicated electric platform, and has a 400-mile range, while the SUV has a towing capacity of 11,000 pounds.
Amazon’s investment in Rivian is part of the company’s green plan. The e-commerce giant plans to operate thousands of Rivian Automotive EVs in more than a dozen cities. This could burnish Amazon’s clean energy star. Amazon will also receive a share of Rivian’s profits.
Rivian has received an order from Amazon to produce 100,000 electric delivery trucks by the end of 2030. Rivian will use a former Mitsubishi plant in Normal, Illinois, to build the vehicles. Rivian Automotive is facing intense competition from established automakers. Tesla is leading the EV charge, and Ford recently announced it will spend billions of dollars developing electric cars.
Rivian has been developing its R1T pickup, which has already received strong early preorders. The truck uses a quad-motor all-wheel drive system, and has a 0-60 mph time of 3.0 seconds. The R1T also uses a large battery pack mounted under the floor, and has a range of 230 miles. It was named Motor Trend’s truck of the year for 2022.
Rivian will start production in Normal, Illinois, in 2020. The plant will create 7,500 jobs, and the company expects the state to see a major economic impact from the plant.
Rivian’s stock has fallen from its IPO highs, but the company’s enterprise value to sales ratio is still below eight, which means the stock is still relatively cheap. Rivian has not announced a sales model yet, but it is likely to sell through a dealer network, like Tesla.
Rivian’s R1T truck is the company’s flagship pick, and has received strong early preorders. The R1T has a range of more than 400 miles, and will have a 250-mile range in January 2022. The truck uses a dedicated electric platform, making it a contender against Ford’s GMC Sierra and GMC Canyon.