PETERBOROUGH, ENGLAND – NOVEMBER 28: Employees select and dispatch items in the huge Amazon … [+]
Last October I argued that Amazon
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Since then, its shares have fallen another 27% and they are down 35% since Andy Jassy took over as CEO.
After announcing second quarter results that included boffo growth in its cloud and advertising services businesses while its unprofitable e-commerce business shrank, I think Amazon’s board should again consider creating two new companies: Amazon Services And Amazon Products.
Amazon Under Andy Jassy
Since taking over as CEO on July 5, 2021 Amazon’s stock has lost about 35% of its value.
Jassy has struggled to clean up the problems left by Amazon’s founder, Jeff Bezos, and new challenges that are a result of economic forces that are out of his control. These include “an ongoing labor battle, the market downturn, growing regulatory pressure, an exodus of top talent [as well as] soaring inflation and slower consumer discretionary spending,” noted CNBC.
Jassy is what I called in my book, Goliath Strikes Back, a fast-follower CEO. As I wrote in February 2021, I saw parallels between Jassy and David Glass who followed Sam Walton as CEO of Walmart
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Whether Jassy can be viewed as successful depends on whether he can keep Amazon’s current businesses growing rapidly while investing in new growth opportunities — analogous to what AWS was when he helped launch it in 2006.
Until that becomes clear, a bit of bright news for Jassy is that thanks to its second quarter performance and prospects, Amazon stock is poised to pop nearly 11% when it opens for trade on July 29.
Amazon’s Q2 Performance And Prospects
Amazon lost $2 billion in the second quarter (including a $3.9 billion write down of its Rivian investment). But investors ignored that and focused on Amazon’s beat of the Q2 consensus revenue target and its optimistic guidance for the third quarter.
They crave expectations-beating growth — which the company delivered. Amazon’s second quarter revenue of $121.23 billion exceeded the consensus estimate by $2.1 billion. And it forecast third quarter revenue growth between 13% and 17%. The midpoint of its guidance range — $127.5 billion — is $1.4 billion higher than analysts were expecting, according to CNBC.
Amazon’s latest quarterly results reinforces the argument that I made last October. It is the tale of two companies: a fast-growing, profitable services business and a shrinking, money-losing online products purveyor.
The services businesses — Amazon Web Services and Advertising did well, according to CNBC:
- AWS enjoyed 33% growth to $19.7 billion which exceeded the consensus by $140 million. AWS’s operating income of $5.7 billion accounted for all of Amazon’s profit plus some in the period
- Advertising grew 18% to $8.76 billion — $120 million more than consensus. What’s more, Amazon’s advertising business grew faster than Google’s
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Meanwhile, Amazon’s products businesses put in a more mixed performance. Amazon’s online stores segment, which includes the bulk of its e-commerce operations, suffered a 4% decline and Amazon blamed the stronger dollar —without which, online stores revenue would have been flat, according to the Wall Street Journal.
The online segment has lost money for three consecutive quarters. As the Journal wrote, “Amazon’s North America division, which houses its core online retail business in its biggest market, reported a third consecutive operating loss, though it narrowed from the prior quarter.”
Jassy summed up Amazon’s mixed performance as follows: “Despite continued inflationary pressures in fuel, energy, and transportation costs, we’re making progress on…improving the productivity of our fulfillment network. We’re also seeing revenue accelerate as we continue to make Prime even better for members [by] investing in faster shipping speeds…[and adding other services.]”
Why Amazon Should Form Two New Companies
I would be excited to own shares in Amazon’s Services businesses and would not want to own stock in its Products businesses. More specifically, I would encourage the company to create two new ones:
- Amazon Services — which would hold the assets of its AWS, advertising, third-party seller services (which enjoyed 9% growth in the latest quarter), and Prime Subscriptions (+10%) business lines, and
- Amazon Products which would give investors a stake in its physical product businesses.
The reason is simple: Services is growing faster than rivals, is highly profitable, and has bright prospects. By contrast, with the exception of its relatively small physical stores unit (+10% in the quarter), Products is shrinking, losing money, and fraught with labor and logistical challenges that are likely to defy solutions over the long run.
I will concede that splitting Amazon into two separate companies would make it slightly more challenging for the Services business to benefit from what it learns from the Product ones.
For example, Amazon’s insights into which items are popular on its third-party seller service has inspired Amazon to offer low-priced knockoffs — such as its Galen line of Allbirds-like sneakers. More importantly, AWS has no doubt benefited tremendously by developing new services to help Amazon operate its ecommerce business.
That cross-business unit sharing would not necessarily be lost were investors to have the option to own Amazon Services and/or Products. The two companies could negotiate contracts to maintain their sharing of valuable insights.
Investors crave expectations-beating growth. In my view, they would prefer to own Amazon’s double-digit, profitably growing Services unit instead of the unprofitably-shrinking Product one.
