Amazon founder Jeff Bezos famously disregarded Wall Street’s focus on profit margins, emphasizing the importance of the customer. However, his successor, Andy Jassy, has been compelled by investors to prioritize profitability. Fortunately, Jassy’s efforts have paid off. On Thursday, Amazon exceeded earnings expectations by posting earnings of 65 cents per share, causing the company’s stock to surge nearly 9% in extended trading.
This substantial earnings beat is reminiscent of February 2021 when Amazon exceeded analyst projections for the fourth quarter of 2020 by announcing a profit of $14.09 per share. This surprising profitability update coincided with Bezos’ announcement that he would step down as CEO.
Since taking the reins, Jassy has transformed Amazon into a leaner version of itself due to slowing sales and a challenging economy. The pressure from investors intensified after the company’s stock value declined by 50% in 2022. Jassy responded by cutting underperforming projects in riskier sectors like healthcare and grocery, freezing corporate hiring, and eliminating 27,000 jobs.
During Thursday’s earnings call, Jassy emphasized the importance of cost-cutting measures. Amazon has successfully reduced expenses in its fulfillment system by transitioning from a national network to eight separate regions. This shift allows the company to store a diverse inventory in each region, leading to faster and more cost-effective product delivery for customers.
In terms of its core business, Amazon’s North American goods sales earned $3.21 billion during the quarter, marking a significant improvement compared to the $627 million loss during the same period last year. These broad-based changes implemented by Jassy have reduced Amazon’s reliance on its cloud business, Amazon Web Services (AWS), for profits. While AWS beat revenue estimates, its profit margin decreased from 29% to 24.2% year-over-year.
Jassy is urging investors to view AWS’s growth rate from a different perspective. Despite already generating over $20 billion in quarterly sales, AWS continues to achieve double-digit growth. Jassy attributes this success to helping companies optimize and reduce their cloud expenses, making the growth rate impressive.
Moreover, Jassy believes that the generative artificial intelligence trend will benefit AWS. Traditional AI and machine learning have already driven significant business for AWS, and the rise of generative AI is expected to further increase adoption of its cloud services. However, this means Amazon will likely need to allocate more capital expenditures to fund its AI initiatives. Jassy welcomes this challenge because it indicates customer success on top of their cloud services.
Overall, Jassy’s focus on profitability has yielded positive results for Amazon. By implementing cost-cutting measures, reducing reliance on AWS, and recognizing the potential of generative AI, Amazon is poised for continued growth in the coming years. Investors will be keeping a close eye on these developments.
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