Slowing Down Amazon's Growth to Achieve Wonder

Andy Jassy's first full year as CEO of Amazon was a big success. The company's stock rose sharply, and it continued to dominate the e-commerce and cloud computing markets. Jassy is a strong leader, and under his guidance, Amazon is sure to continue to thrive.

This year has been one for the books—and not in a good way.

A macroeconomic slowdown coming just as Amazon has been trying to absorb a major expansion of its fulfillment capacity has proved especially unfortunate for the e-commerce company. When it reports full results for 2022 later this month, Amazon is expected to show its first-ever year of percentage revenue growth in the single digits, while operating margins have fallen by more than half from the previous year. This is a far cry from the double-digit growth and high margins that investors have come to expect from Amazon, and it underscores the challenges that the company is facing as it tries to maintain its momentum in the face of a slowing economy.

Wall Street has been tough on Amazon; the company's share price fell 50% in 2022, its worst year since the dot-com bubble burst. This was notably worse than its mega-tech peers', with the exception of Facebook-parent Meta Platforms. Amazon has lost more than $1 trillion in market value since its stock peaked in July 2021, during Mr. Jassy's first week on the job.

The slowing economy has hampered both retailers and cloud companies, Amazon’s two main businesses. And the ill-timed decision to blow out Amazon’s delivery network was made under the supervision of former chief Jeff Bezos. Mr. Jassy is overseeing layoffs now expected to affect more than 18,000 workers—mostly among corporate staff—The Wall Street Journal reported on Wednesday. Amazon's current troubles can't really be blamed on a massive strategic misstep by its current boss, unlike the woes of Facebook's parent.

In the long term, it will be up to Mr. Jassy to chart a new course for Amazon. And it is likely that it will be different from the past. Amazon has managed to defy the law of large numbers for some time now; revenue growth averaged 28% annually for the five-year period ending in 2021—which is faster than growth at Apple, Microsoft and Alphabet—even though Amazon’s annual sales were approaching the $500 billion mark. But growing at even half that rate over the next five years would require Amazon to eventually be adding $100 billion of new business annually.

It is unlikely that Amazon will continue to grow at the same rate under Mr. Jassy. Amazon has never had the same kind of margins as its tech peers, due to its focus on retail. However, its growing proportion of cloud revenue has kept its operating margin above 5% for the past four years. This is more than double what it averaged over the previous four years.

According to current consensus estimates, Amazon's operating margins will cross into double-digit territory by 2027. If the company can deliver on that even sooner, it could help Mr. Jassy win back investors. The company's booming advertising business will help here. Amazon now generates about $38 billion in ad revenue and has the third-largest share of the U.S. digital ad market, according to Insider Intelligence.

Despite this, both of Amazon's core businesses will face significant challenges in 2023. The likelihood of a global recession will reduce people's willingness to spend money. According to data released Thursday by Adobe, nationwide holiday e-commerce sales only rose by 3.5% this year, compared to 8.6% last year.

The AWS cloud business could be impacted by economic weakness, as its large corporate clients may need to reduce their spending. UBS analysts lowered their full-year projections for both AWS and Microsoft’s Azure business on Tuesday, due to “the worst tone that we’ve heard in years” from large cloud customers.

Amazon's newer business ventures come with some risk. For example, the company owns MGM and reportedly plans to spend $1 billion a year on 12 to 15 theatrical movies. The profitability of these movies will depend greatly on whether more people return to theaters. Additionally, the pending acquisition of 1Life Healthcare is not expected to generate any profits. The primary-care provider has been losing money for the past three years and is projected to continue doing so for the next three years.

Amazon is known for its innovation, and its drive to succeed. The company's name was almost "Relentless.com", a reflection of its founder's determination. Today, Amazon is the second-largest provider of corporate software, thanks to the success of its subsidiary created by CEO Jeff Bezos. Now it falls to his successor, Andy Jassy, to continue Amazon's growth and profitability.