Amazon Struggling with Costs and Space, Growth Still Looks Decent

Amazon got the doom and gloom treatment from analysts yesterday. I'm more positive on average, but some things not adding up.

Good news about Amazon, they make money in a lot of different ways. Used to be about AWS. Now it's about AWS and Ads.

1 - Growth seems up for the moment

19% constant currency sales growth. Better than I expected really. Yes Prime Day is in here. They are back to growing faster than Shopify on a constant currency basis. (Harley mentioned 15%). This is the power of the Amazon business model.

I do think marketplaces will benefit in this environment.

2 - Productivity/Cost Savings Not Being Realized.

The team shot for $1.5B in improvements in Q2. Reached $1B.

If a normal person misses a sales quota by 50%, someone gets fired! Anyway you slice it, this is not great achievement to plan.

Yes Prime Day is in here, which will depress margins. And Q4 isn't going to help either - they said as much on the call. This is going to push "promised cost savings" into 2023.

Capex at $60B for 2022, about $10B less than last year.

This is why analysts are up in arms. The cavalry is not coming.

3 - What's going on with storage? Follow me.

- You double your fulfillment network

- You are still cutting FBA seller storage limits actively.

- Inventories are up, but not doubled.

- POs to first-party vendors are dropping consistently because "our warehouses are full"

You doubled your fulfillment network (they keep blaming costs on this) from one side of their mouth. From the other side of their mouth, your warehouses are full.

Two likely explanations.

(a) These warehouses are not yet online and making a serious impact, and

(b) The ones that are, are not staffed. These are tough jobs to fill, despite the fact that Amazon pays above market. They need a lot of people, and half of the US has tried and quit an Amazon warehouse ;-)

There is an untold story here lying beneath the surface. It's definitely (b) [how could it not be], but I can't tell how much is also (a).

4 - 3P units up to 58%, from 56% last year.

Third-party seller train keeps chugging.

5 - Lord of the Rings (LOTR) and Thursday Night Football are big part of the Prime flywheel.

LOTR: More Prime signups than any other Prime original.

Remember this. Original content = More Prime members = flywheel.

Let's see if they stay on!

6 - Advertising up 30% y/y excluding currency.

Star of the show!

7 - AWS up 28% y/y excluding currency.

$82B annualized business. Unreal.

Growing in the mid 20s at the moment, and what they projected for Q4, even though growth was 28% for the whole quarter. So slightly decelerating at the moment, due to customers trying to save money, consolidate usage, etc.

Slightly decelerating margins due to upgrades, etc. Energy costs doubled since before the pandemic (electricity/natural gas). Sounds like pain is coming.