AWS cannot become true hypergrowth

AWS cannot become true hypergrowth by staying on parent Amazon’s slow train

Lots of excitement about Amazon’s recent earnings report last week. The stock gained 13.5% on Friday.

And certainly, its good to see the AWS business accelerating to 40%YOY in Q42021.

However it is important to note that with the exception of AWS and Physical store sales, every other business line of the parent company has been slowing down and becoming less profitable along the way.

Top line and bottom line deceleration because competitors like Walmart and Target are capturing bigger shopping cart sales from local residents by offering free home delivery, same-day delivery and convenient pick-up-from-the-store-parking-lot services.

AWS will have to increasingly shoulder the weight of its sibling retail business lines.

First lets look at some revenue numbers

Net Sales ($M)
                          Q32020  Q42020  Q12021  Q22021  Q32021  Q42021
Online stores            $48,350 $66,451 $52,901 $53,157 $49,942 $66,075
YoY% excl. f/x               37%     43%     41%     13%      3%      1%

Physical stores           $3,788  $4,022  $3,920  $4,198  $4,269  $4,688
YoY% excl. f/x             (10)%    (7)%   (16)%     10%     12%     16%

Third-party seller serv. $20,436 $27,327 $23,709 $25,085 $24,252 $30,320
YoY% excl. f/x               53%     54%     60%     34%     18%     12%

Subscription services     $6,572  $7,061  $7,580  $7,917  $8,148  $8,123
YoY% excl. f/x               32%     34%     34%     28%     23%     16%

Advertising services      $4,982  $7,350  $6,381  $7,451  $7,612  $9,716
YoY% excl. f/x               52%     66%.    76%.    88%.    52%     33%

AWS                      $11,601 $12,742 $13,503 $14,809 $16,110 $17,780
YoY% excl. f/x               29%     28%     32%     37%     39%     40%

Other                       $416    $602    $524    $463    $479    $710
YoY% excl. f/x               18%     42%     49%     34%     15%     19%

And now lets look at profitability

                          Q32020  Q42020  Q12021  Q22021  Q32021  Q42021
North America
Operating income          $2,252  $2,946  $3,450  $3,147    $880  $(206)
YoY% excl. f/x               76%     55%    162%     45%   (62)%  (108)%
Operating margin            3.8%    3.9%    5.4%    4.7%    1.3%  (0.2)%

Operating income            $407    $363  $1,252    $362  $(911) $(1,627)
YoY% excl. f/x               N/A     N/A    347%   (53)%  (330)%  (533)%
Operating margin            1.6%    1.0%    4.1%    1.2%  (3.1)%  (4.4)%

AWS Segment
Operating income          $3,535  $3,564  $4,163  $4,193  $4,883  $5,293
YoY% excl. f/x               57%     41%     41%     32%     40%     46%
Operating margin           30.5%   28.0%   30.8%   28.3%   30.3%   29.8%

If you want to dig further, look up their cash flow numbers in the earnings report. Same story - declining numbers and YOY% comparisons.

If I want to own a retailer, I might be better off buying TGT or WMT.

If I want to own a cloud company, I will skip AMZN. I prefer and am long pure-plays like DDOG, CRWD, S, NET.



Based on Q4 earnings, AWS is at a $70b run rate. Amazon taken all together has a market cap of 1.6T. That means if Amazon was ONLY AWS, it would be trading at a P/S multiple of 22 (based on Q4 run rate). That valuation seems to be pretty in line with todays cloud computing 40% growth cohort, and it gives you the rest of Amazon for free. Just doing this little exercise makes me want to go out and buy some more Amazon.


Not to mention supply chains were decimated in Q4 after being really really bad in Q3. Container shipping rates were astronomical (like $20,000 per 40ft container vs. $2500 pre-Covid) on top of extreme delays in port-to-door goods transit times particularly due to delays at the US ports.

AWS is the star but I wouldn’t overlook advertising services. It slowed to to a 30+% yoy growth rate vs. 50+%. But lots of advertisers were probably low on or out of stock for some of Q4. I’m sure this had an effect. They are constantly adding new advertising features. I’m a seller and I’m having a hard time keeping up. That said, their search result and product pages are covered with more and more ads every day, and there’s only so much available space left for more advertising modules. Still, this high margin SAAS-like segment has a lot of growth left in it.


The point is that I only like the AWS performance, but not the rest of the junk that comes along with it. AWS will not be able to grow at its fullest potential because it will be used as a cash machine to fund the other slower, lower margin businesses.

I would not own DDOG, if it went out and bought a mall. Or NET if it acquired a chain of soul cycling studios. No disrepect intended to soul cycling :slight_smile:

AWS is a growth business, AMZN is not a growth company any more. By most valuation metrics, it is expensive.

Jim Jubak (ex-MSN Money) happened to comment on this yesterday…

From his post:
First, all this spending means that an investor buying Amazon at a price-to-earnings ratio of 50 is getting a company that generates comparatively low returns on its invested capital. Return on invested capital for Amazon in 2019 was 11.72%. Return on assets was 5.9%. Operating margin was 5.18%. Compare this to Alphabet (GOOG), which isn’t building warehouses to hiring workers to ship boxes. Return on invested capital in 2019 for Alphabet was 16.5%. Return on assets was 13.5%. Operating margin was 22.2%. All that means is that it requires Amazon to invest a lot more dollars to generate return for shareholders than it does for Alphabet.

Second, Statista has broken down Amazon’s logistics costs into two categories, shipping and fulfillment. Fulfillment is a category that includes operating and staffing fulfillment centers (the warehouses that ship out stuff), customer service centers, and physical stores. What’s striking is that fulfillment has in recent years grown even faster than shipping. In 2020 Amazon’s shipping costs, which include sortation and delivery centers and transportation costs, amounted to $76.7 billion. Fulfillment costs added another $75.1 billion making up roughly half of the company’s logistics bill. What the figures argue is that Amazon has become a very labor intensive company and a lot of the growth in the size of the company’s workforce has come in the last year or two. In 2020 the company created 500,000 new jobs and added another 170,0000 in the first nine months of 2021. Amazon now has 1.5 million employees across the world and is second in the size of its workforce only to Wal-mart, which employs 2.2 million worldwide. Which makes Amazon very, very sensitive to rising labor costs. But the company’s labor cost structure may be even more subject to disruption than these raw numbers suggest. Amazon chews through workers at an amazing pace. The average Amazon warehouse worker leaves within just eight months. That’s a reaction to the high stress, breakneck speed, constant monitoring, and stingy breaks that are standard at Amazon’s warehouses. It makes me wonder if Amazon’s business model is actually sustainable.

Third, I’ve got to wonder about Amazon’s infatuation with physical stores. Buying Whole Foods Market looks to me–as a once faithful and now infrequent Whole Foods shopper–to be a failure. (And, of course, there is the question of why a company that itself should be looking to raise margins would invest in the notoriously low margin grocery business.) And why the roll out of Amazon standalone stores–even if they have really neat automated technology at point of sale? Why the talk about a partnership with Kohl’s (KSS)? As a way to handle returns? One of the big doubts about Amazon over the years has been about the company’s investing discipline. (Why build hardware for TV or to read e-books, for example?) The problem doesn’t seem to have disappeared. It may be in the company’s DNA. And as an investor I don’t like companies that seem focused on buying into businesses with low margins.