Financial News
Amazon Needs To Do This To Skyrocket in 2023
The stock of Amazon (AMZN) has plummeted this year, and there’s plenty of blame to go around.
For the first time, revenue is expected to climb in the single digits this year, while profits have plummeted as Amazon over-expanded its capacity during the pandemic. Macroeconomic headwinds have dragged on both its e-commerce company and its cloud computing segment, Amazon Web Services, since then.
With the stock down 50% this year, Amazon has emerged as a popular bet to make a return in 2023. After all, the digital behemoth retains a number of competitive advantages, including strong positions in e-commerce and cloud computing, as well as potential new ideas such as Amazon Go.
While Amazon’s success in 2023 would be influenced by the macroeconomic environment, one factor will cause the stock to skyrocket.
Increasing the bottom line
Historically, Amazon has prioritized top-line growth over profits, focusing on market share gains and expanding the company for the long term.
However, that method appears to be exhausting, as annual revenue is expected to exceed $500 billion, and growth appears to be slowing for both cyclical and secular reasons.
With top-line growth slowing, Amazon may need to better monetize the vast business it has developed while investing for the long future. The corporation lost $26.3 billion in free cash flow over the last four quarters as it aggressively expanded its data centers, warehouses, and other infrastructure.
Its accounting earnings have also declined, with operating income falling from $21.4 billion to $9.5 billion in the first three quarters of the year.
With the price falling, sales growth stalling, and earnings declining, the most critical thing Amazon can do to drive a stock rebound is to minimize expenses and maximize profitability.
In recent months, the company has taken a number of cost-cutting measures, including the closure and cancellation of dozens of warehouses, the layoff of 10,000 corporate employees, and the closure of a number of unprofitable business lines, including Amazon Care, which was once considered one of its most promising new ideas.
However, the last few months have demonstrated how many unprofitable projects Amazon has. The business, for example, loses $10 billion every year in its Alexa division. Amazon has been operating outside the United States for more than two decades, yet the corporation rarely makes a profit in its foreign segment. It lost $5.5 billion in its overseas sector during the first three quarters of the year.
Management has stated that while the company is profitable in more mature regions like the United Kingdom and Japan, it is continuing to expand Prime benefits in newer markets, which is causing the losses. Given the lack of return on its worldwide investments thus far, the corporation may wish to limit its international expansion.
Similarly, Amazon is on course to spend $15 billion this year on Prime Video, which is more than Netflix spends on its streaming service. The majority of that video content cannot be directly monetized by Amazon. It is only used as a secondary perk to motivate Prime membership and loyalty, which should make it a cost-cutting target.
Amazon lost more than $8 billion outside of AWS in the first three quarters of the year. Despite all of the acclaim heaped on Prime, the program is really losing money for Amazon, and this is unlikely to change unless a concerted effort is made to rectify it.
The potential of Amazon
Though Amazon is losing money in many areas, it has many high-margin businesses, like AWS, which is expected to create around $23 billion in operating income this year, and advertising, which is expected to generate more than $30 billion in sales. Amazon does not disclose advertising profits, but based on the results of peers such as Alphabet and Meta, it is anticipated to have margins in the 20% to 30% range.
Finally, because of its current fulfillment infrastructure and dominant position in e-commerce, Amazon’s marketplace has the potential to produce substantial margins.
In other words, Amazon has the potential to be far more profitable than it is today, but the corporation must exercise greater fiscal discipline.
If the corporation can decrease costs and return profits to 2021 levels, the stock might skyrocket in 2023, especially after the share price has been cut in half this year.
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