Holding Name: Amazon.com, Inc. (NASDAQ: AMZN)
Percent weighting of strategy: ~4.3%
TLDR: The layoffs announced this week signal that management is being financially disciplined in the face of consumer and enterprise uncertainty - an encouraging sign for long-term investors despite macroeconomic headwinds.
Business overview: Amazon.com Inc (Amazon) is an online retailer and web service provider. The company operates through three segments: North America, International, and Amazon Web Services (AWS). It sells merchandise and content purchased for resale from third-party sellers through physical and online stores. In addition, it offers programs that enable sellers to sell their products on its websites, as well as its stores; and programs that allow authors, musicians, filmmakers, Twitch streamers, skill and app developers, and others to publish and sell content.
The company provides compute, storage, database, analytics, machine learning, and other services via Amazon Web Services. The company also facilitates fulfillment, advertising, publishing, and digital content subscriptions. Additionally, it is famous for Amazon Prime, a membership program, which provides free shipping of various items; access to streaming of movies and series; and other services.
Why we own it: Amazon is the dominant online retailer capturing more than 50% of all retail and enterprise IT spend shifting online. Its combination of wide selection, low prices, and fast delivery creates a flywheel which widens its economic moat over time.
Amazon Web Services is potentially a $250B+ business today and a major contributor to Amazon's free cash flow. It enables enterprises to outsource their IT infrastructure at a very low cost, creating a sticky and recurring revenue stream for AMZN.
We believe the company will continue taking market share in many other $100B+ verticals, including delivery, content, and search advertising. These remain highly under-penetrated markets offering a long runway of potential growth. Amazon is a true compounder - reinvesting profits in an effort to continuously fuel growth.
What’s the latest: Amazon announced plans to lay off approximately 10,000 employees in corporate and technology jobs starting as soon as this week. The company notes that the cuts will focus on Amazon’s devices organization including voice assistant Alexa as well as its retail and human resources divisions.
As we enter a new era of slower revenue growth, the cuts display financial discipline from Andy Jassy and the management team at Amazon. We believe these cuts will lead to greater efficiency from AMZN which should be a tailwind for margins in the medium term. The company has showcased diligence in cost-cutting and has plenty of white space for further optimization in the first half of 2023.
Despite revenues, operating income, and 4Q guide coming in below consensus expectations during their latest earnings report, we believe that margins should normalize as the company continues to scale and the headwinds today will be largely transitory.
Sign posts moving forward: Moving forward, we will be paying close attention to the end-demand for both enterprise and retail customers. These metrics should be reflected in both AWS and e-commerce, and Cyber Monday in combination with the holiday season will be key.
We are also monitoring comments and performance around operating income and free-cash-flow margins. These metrics will dictate how the company plans to manage profitability in the near term while making it clear the steps to be taken for plans for long term profitability.
Furthermore, we will be carefully paying attention to AMZN’s advertising growth relative to other digital advertisers such as META. Assuming that AMZN’s advertising business is more defensible given they own the platform where users look to shop, growth trends in their advertising model are of the utmost importance.
The content contained in this material is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, solicitation of an offer, or investment advice.
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