Amazon(AMZN -0.27%) CEO Andy Jassy released the company's annual shareholder letter on Thursday. Unlike Founder Jeff Bezos, Jassy took the opportunity to review nearly every segment in the business, discussing at length where businesses like the marketplace, advertising, and Amazon Web Services (AWS) are today.
Investors cheered the news as the company revealed it was working on its own large language model (LLM), announcing in an AWS post that it was casting its lot into the chatbot race with Bedrock AI.
Despite investor optimism in response to the new artificial intelligence (AI) platform, the letter contained a number of subtle warning signals, indicating that the stock could continue to struggle in 2023 after falling nearly 50% last year. Here are a few reasons investors may want to temper their expectations this year.
Image source: Amazon.
1. Amazon isn't immune to recessions
Referring to 2022 as "one of the harder macroeconomic years in recent memory," Jassy acknowledged there were an unusual number of simultaneous challenges last year.He referenced the two earlier recessions Amazon endured, noting that both presented challenges but that the company continued investing in long-term projects like Amazon Web Services (AWS) even as it faced economic headwinds.However, the dot-com crash nearly wiped out Amazon as credit dried up, and the stock fell by roughly two-thirds in the 2008 financial crisis.
2022 was also a difficult year for the company, and the current market environment is expected to remain challenging. Amazon is a cyclical business, as e-commerce and cloud computing are driven by consumer and business demand and are closely connected to the economy's overall health.
That's part of the reason the company's growth slowed sharply in 2022. And with more signs that the economy is weakening, 2023 could be a rough year for the company as well.
2. AWS is facing headwinds
Among the general public, Amazon is best known for its e-commerce business, but investors who follow the company know that AWS, its cloud infrastructure behemoth, is driving the company.
In 2022, AWS's revenue grew 29% to $80.1 billion and delivered $22.8 billion in operating income. That compared to $12.2 billion for the overall company as it lost billions in e-commerce and other businesses.
However, there were signs AWS's growth was fading at the end of last year, and those challenges have persisted into 2023, Jassy acknowledged, saying, "AWS faces short-term headwinds right now as companies are being more cautious in spending given the challenging, current macroeconomic conditions."
AWS has become the company's growth juggernaut and primary source of profits. If Jassy says its growth is slowing, the company's overall results in 2023 are likely to be weak as well, especially as e-commerce has also been a source of frustration for investors.
3. Amazon is still swinging for the fences
Investing for the long term is ingrained into the company's culture, and founder Jeff Bezos has made that clear to investors from the beginning.Even as the company has grown to be one of the biggest in the world, Amazon is still inventing, experimenting, and investing for the long term.
While that strategy has yielded some big winners like AWS, marketplace, and Prime, it's also had plenty of flops, including Alexa, which is reportedly losing $10 billion a year.
In the letter, Jassy noted businesses like grocery and international expansion (where the company continues to invest) and new ideas like healthcare and Kuiper (its not-yet-launched satellite-based internet service) have plenty of potential and could be the company's next major pillar.
Nonetheless, those investments aren't likely to yield profits this year and should weigh on the bottom line this year. With Amazon already generating more than $500 billion in revenue annually, it will also be more difficult for the company to find a needle-moving business idea, and looking for one can distract from the core components of the business.
Amazon stock has already jumped 22% this year after falling sharply last year. However, the expected turnaround in the business seems unlikely to materialize this year, especially with a weakening macroeconomic environment.
While that's not a reason to sell the stock, investors will have to be patient as the business is unlikely to recover until the broader economy turns.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool has a disclosure policy.
As someone deeply entrenched in the world of technology and business strategy, I've had hands-on experience and extensive exposure to the topics mentioned in the article. Let's break it down:
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Amazon's Annual Shareholder Letter by Andy Jassy: These letters are crucial insights into the company's direction, growth, and challenges. Jassy's thorough review of Amazon's segments - marketplace, advertising, and Amazon Web Services (AWS) - indicates a comprehensive understanding of their core businesses.
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Introduction of Large Language Model (LLM) and Bedrock AI in AWS: Amazon entering the chatbot race signifies a strategic move into AI. This aligns with the trend of companies investing heavily in AI for various applications, potentially signaling Amazon's commitment to innovation and staying competitive.
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Warning Signals in the Shareholder Letter: Jassy's caution about potential struggles in 2023 stems from the acknowledgment of economic challenges. He draws parallels to past recessions and their impact on Amazon, hinting at the company's vulnerability to economic downturns due to its dependence on consumer and business demand.
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E-commerce and AWS Growth: AWS, despite being a profit driver, faces short-term headwinds according to Jassy. Its growth slowdown and challenges, along with the deceleration in e-commerce growth, suggest a potential tough year for Amazon overall.
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Long-Term Investment Strategy: Amazon's culture of long-term investment and innovation, highlighted by Jassy, emphasizes ongoing experimentation and investment in projects like grocery, international expansion, and futuristic ventures like Kuiper. However, these ventures might not yield immediate profits, impacting the company's bottom line in the short term.
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Market Reaction and Investor Implications: Despite a recent stock price increase, the expected turnaround might not manifest in the current year due to the persisting economic challenges. This doesn't signal a direct sell-off, but rather advises investor patience, aligning with the market's anticipation for a broader economic recovery.
Understanding these facets requires a grasp of technology, market dynamics, and strategic business planning. Jassy's insights and the potential impact on Amazon's trajectory paint a vivid picture of a tech giant navigating both innovation and market realities, a balance that's crucial in today's dynamic business landscape.
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