Amazon stock down 3.7% – Divide it into Amazon services and products


It’s time to break Amazon.

Amazon started out in life as a website partnering with the physical world. As I wrote in my book, Goliath Strikes Back, when these partnerships failed to meet Amazon’s order fulfillment goals, Amazon built warehouses and a logistics fleet to deliver goods in two days or less.

Along the way, he’s also built service businesses – including Amazon Web Services, advertising, third-party seller services, and Prime subscriptions – which now account for more than half of his revenue and the bulk of his profits. .

According to MarketWatch, a report on poor third-quarter earnings left its stock – up 8.6% in 2021 – well behind the S&P 500’s 39% pop for the year. Amazon’s stock price performance in 2021 is well below its average annual increase of 33.2% over the decade ending in 2020.

Here’s a way to give investors a chance to get back to this market-beating share price growth. Amazon should split in two:

  • Amazon Services – who would own the assets of its AWS units, advertising, third-party vendor services and core subscriptions
  • Amazon Products which would give investors a stake in its physical products business.

While this doesn’t solve Amazon’s fundamental growth problem, it would give investors the choice to bet on low asset-intensive Amazon businesses – which I like – or asset-intensive ones. .

(I have no financial interest in the titles mentioned).

Amazon’s two bad neighborhoods under Andy Jassy

Amazon founder Jeff Bezos handed the CEO role to Andy Jassy at the right time. This is because investors are rewarding companies that exceed analysts’ expectations for revenue and profit growth and increase their forecast for the coming quarter.

While Amazon has accomplished this very often under Bezos’ leadership, it has missed and dropped twice in a row under Jassy.

For example, in the second quarter, Jassy was in the hot seat when Amazon reported disappointing results and its stock fell 7.2%. As I wrote in July, in the second quarter Amazon reported revenue that rose 27% but fell $ 2.4 billion below analyst estimates.

The real boost was Jassy’s far less rosy – a forecast for revenue growth of 13% – for the third quarter. This was well below Amazon’s 10-year average revenue growth rate of 27.4%. Additionally, Amazon’s estimated revenue range of $ 106 billion to $ 112 billion was about $ 10 billion lower than the consensus estimate.

On October 28, Amazon again failed to meet investor expectations and forecast an even worse fourth quarter. According to CNBC, third-quarter revenue rose 15% to $ 110.8 billion, about $ 810 million lower than analysts polled by Refinitiv, while earnings per share of $ 6.12 were 31% below expectations.

Amazon is forecasting fourth-quarter revenue growth well below analyst estimates. Amazon predicts revenue will grow in a range of 4% to 12%, with the midpoint – $ 135 billion – $ 7.2 billion lower than analysts’ expectations for growth of 13.2%.

Amazon intends to fulfill its obligations to its customers and partners by spending additional money. As Jassy told investors, in Q4 Amazon plans to incur “billions of dollars” in additional costs in its consumer business due to “labor shortages, higher wage costs, global supply chain constraints and rising freight and shipping costs, ”CNBC reported. .

Bright prospects for Amazon services

These prospects do not look very promising for investors. However, Amazon’s financial report makes it clear that the stock owns two very different types of businesses: one that I would dearly like to own and one that I would avoid.

I want to own shares in Amazon Services. These companies now account for just over half of Amazon’s revenue and all of its profits. As CNBC reported, revenue from AWS, advertising, third-party seller services, and Prime subscriptions was $ 55.9 billion. In addition, AWS revenue rose 39% to $ 16.11 billion, $ 630 million more than analysts had expected, according to CNBC.

AWS operating profits of $ 4.88 billion saved Amazon from losing money. After all, Amazon’s total operating profit was $ 880 million in the quarter, and “without the big profit from AWS, Amazon would have recorded a loss for the quarter,” CNBC noted.

Amazon has also benefited from strong demand for its digital advertising business – the unit primarily containing that business saw a 50% sales increase, according to the Wall Street Journal.

Admittedly, another of its service activities did not perform as well. Specifically, third-party seller services revenue – market commissions and fulfillment and shipping fees – increased 18% to $ 24.25 billion – a significant slowdown from the 60% growth in the first quarter and 34% in the second quarter.

The heartbreaking future of Amazon products

The rest of Amazon’s business shows slowing growth and rising costs.

Overall online sales, which have seen double-digit growth over the past four years, slowed to 3% growth in the third quarter. North American retail operating profit fell 61% to $ 880 million in the third quarter, according to MarketWatch.

International retail – which has been profitable in the first five quarters of the pandemic – turned into a loser in the third quarter. As MarketWatch reported, its international retail unit suffered a loss of $ 911 million.

Amazon qualifies these international units as potentially profitable investments at various stages. As CFO Brian Olsavsky told investors, “established countries in Europe and Japan are moving closer to North America’s results.” In contrast, other countries – Brazil, the Middle East, Australia, Poland and Sweden – still consume money, he suggested.

As revenue growth slows and losses increase, Amazon incurs higher costs in its product business. As CNBC noted, Amazon “is adding new shipping ports and increasing its fleet of planes and trucks; plans to hire 275,000 permanent and seasonal employees; and… handing out $ 3,000 login bonuses and launching new perks like free tuition.

The benefits of dividing Amazon into products and services

I think it’s good for Amazon in the long run to incur the costs necessary to meet its obligations to deliver the products they order to customers on time. If these investments improve consumer and employee satisfaction, Amazon will be a better business in the long run.

However, it seems to me that selling products on the Internet is a mature industry that will not provide investors with higher than expected growth. In contrast, Amazon’s services, including AWS and digital advertising, are growing rapidly and generating huge profits.

Certainly, I do not know how difficult it would be to separate their operations. Still, it’s possible that AWS, released from Amazon, could grow faster, as potential customers wouldn’t be concerned that AWS membership would fund an e-commerce competitor. I don’t know if it would be

While not a perfect analogy, it should be noted that when eBay

separated from PayPal

in July 2015, the two ended up performing better than they were together.

How? ‘Or’ What? Between the time eBay acquired PayPal (October 2002) and the time PayPal began trading as an independent company (July 2015), eBay shares rose at an average annual rate of 12.9%.

Since then, the two companies have been better investments. EBay shares have risen at an annual rate of 16.5% in the six years and three months since the spin-off, while PayPal shares have sprinted more than twice as fast, at a rate annual rate of 35.6%.

If Amazon broke away from Amazon Services, I would expect it to be a better investment.

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