Without Bezos, does Amazon still have a future? input: ====== Longbridge 是一家科技公司，开发出了一种智能语音助手 Dolphin，深受用户喜爱。海豚君是 Longbridge 的分析师，他正在研究 Dolphin 的用户反馈数据，以便改进产品。 ====== output: Longbridge is a tech company that has developed a smart voice assistant, Dolphin, which is loved by users. Dolphin Analyst is studying user feedback data to improve the product.

On February 3rd, after the U.S. stock market closed on Beijing time, Amazon released its Q4 2022 earnings report. The key points are as follows:

1. Guidance suggests robust retail consumption: Among the two largest macro variables in 2023, there are relatively clear judgments on the inflection point of inflation and the top of the interest rate market, but there is no clear judgment on how much the U.S. economy will decline this year, which is currently the largest expected difference. Performance outlooks of behemoths like Amazon are useful references for assessing the macroeconomic landscape, and for Q1 2023, Amazon's revenue is expected to be in the range of 121-126 billion U.S. dollars, which is basically in line with market expectations of 125.5 billion.

So what are the expectations reflected in this guidance for each business? Based on Azure's guidance, assuming that AWS's growth rate in Q1 2022 drops by another 5 points to 15%, and the deterioration of international retail leads to a year-on-year decline of over 10% next quarter, the implied growth rate in the North American retail sector is 15%, which is even higher than this quarter. This shows that Amazon's expectations for the North American retail sector are not poor and also correspond to Dolphin Analyst's core judgment of this financial report, that the advantages and disadvantages of consumption/industry Internet are reversing, and consumer-oriented businesses will once again be optimized.

2. AWS becomes a drag: As the profit center and pearl business that sustained Amazon's growth in previous quarters, AWS cloud services have seen disappointing revenue and profit performances for two consecutive quarters. Its revenue was 21.4 billion U.S. dollars, with a year-on-year growth rate that slowed significantly by 7 points to 20%, less than the market expectation of around 22%. The operating profit was 5.2 billion U.S. dollars, also falling short of the market expectation of 5.6 billion. The operating profit margin also fell again by 2 points to 24% on a quarter-on-quarter basis, shrinking for four consecutive quarters. It can be said that the old problems of slowing growth in the retail sector and poor profitability have become new problems for AWS.

3. Advantage in retail sector despite poor performance from AWS: Although AWS cloud business performed poorly, Amazon's total revenue and total operating profit were 2% and 10% higher than expected, respectively, mainly due to the previously weak retail sector performing better than expected. The primary business outperforming expectations were third-party (3P) seller services and advertising revenue. Among them, 3P seller services generated revenue of $36.3 billion, with a counter-cyclical YoY growth rate of 20%, far better than the market expectation of 7%. The revenue growth rate of advertising also reached 18.9%. Dolphin believes that the main reason for Amazon's outperformance above expectations in 3P businesses is a series of more severe pricing measures (i.e. increasing revenue) employed. However, at the same time, in an economic downturn, merchants are more reliant on e-commerce platforms that have stronger and more direct monetization methods (similar to Pinduoduo in China), so Amazon will have a relatively strong competitive position.

4. Retail sector losses decrease, technology investments still high: Although AWS profits fell short of expectations, the better-than-expected reduction of losses in the international retail business filled AWS's "hole." This season, the international retail sector suffered an operating loss of $2.2 billion, much less than the market expectation of $2.78 billion, and the loss rate decreased from 8.9% in the previous quarter to 6.5%, which instead exceeded the company's overall profit expectations. From a cost perspective, with the company's layoffs and the recovery of logistics and contract fulfilment efficiency, the proportion of fulfilment costs in this quarter's revenue decreased by 0.8pct to 15.5%, which is close to the normal level before the pandemic. But the company's sales expenses and technology & content ratios are still relatively high. Dolphin analyst believes that the significant expansion of costs is due to the expansion of investment in AWS business and the transformation of Prime members from shopping to comprehensive entertainment members including films, experiences, and games.

Dolphin analyst's point of view:

Overall, the retail sector has shown more resilience than expected in the past two quarters since Q3, while AWS cloud business has continued to weaken in revenue and profit. Dolphin believes that although daily consumer spending may deteriorate, the downward elasticity is relatively limited and online platforms will be relatively dominant as European and American economies are likely to enter a recession next year. From the performance of Microsoft and Amazon's cloud businesses, the elasticity and space for business deterioration on the 2B side are relatively high.

Therefore, when the market fully expects the impact of cloud business deterioration, Amazon, which is a leader in both 2C/2B businesses, will show relative resilience and advantages. With the probable recession of the European and American economies in the future (the degree is still unknown), the company will further reduce costs and increase efficiency by continuing to lay off employees, reversing the uneconomic scale problem caused by excessive investment in the retail sector, and the retail sector is likely to gradually turn losses into profits and release the currently undervalued valuation of the retail sector.

Therefore, Dolphin believes that Amazon is still the most upwardly flexible target in the current American Internet sector. However, it should also be emphasized that during the period when the market gradually reduces its expectations for the cloud business, Amazon's stock price is likely to plunge again.

Dolphin analyst will share the telephone meeting summary with dolphin users through the Longbridge App later. Interested users are welcome to add WeChat account "dolphinR123" to join the Dolphin Investment Research Group and obtain the telephone meeting summary in real time.

I. What do you need to know about Amazon?

In terms of revenue structure, Amazon's business is mainly divided into two categories: retail-related business and cloud services. Among them, the retail category can be subdivided into self-operated, 3P online seller services (commission and fulfilment fees), online advertising, membership and subscription services, and offline retail business.

From the revenue structure, Amazon's self-operated retail business still occupies more than half of the share, but the proportion is gradually declining. However, from the perspective of operating profit, the company's AWS cloud service business contributes most of the profits with about 15% of the revenue share. Therefore, although Amazon is still dominated by retail business, with the gradual increase of high-profit revenue such as cloud services, advertising, and merchant platform services, the nature of the company has changed from a "retailer" to a "tech company" that mainly provides online services.

Source: Dolphin Research

Detailed analysis:

2. The Pros and Cons of Consumer/Industrial Internet Are Reversed, AWS Cloud Business Became a Burden

In the past few quarters, AWS cloud business has always been the mainstay of Amazon's overall business when the retail sector had neither growth nor profit. However, since 3Q22, as various enterprises gradually feel the chill of "decline" and cost reduction, the AWS cloud business has become a "drag" on the company's performance.

This quarter's AWS revenue was $21.4 billion, a significant slowdown in growth rate of 7% to 20% QoQ, which was lower than the market expected growth rate of about 22% YoY. Although the trend of cost reduction and reduction of IT spending has emerged among European and American enterprises since the last quarter, the degree of AWS growth slowdown is still exaggerated. In comparison, Azure's revenue growth decelerated by only 4% this quarter.

In addition to the significant slowdown in revenue growth, the profit margin of AWS business has also been continuously declining. AWS achieved an operating profit of $5.2 billion this quarter, lower than market expectations of $5.6 billion. The operating profit margin also fell by another 2% to 24% QoQ. This is the lowest point since 2017 and has been continuously narrowing for four quarters. Dolphin Analyst believes that the impact of "consumer downgrading" and the increase in server energy and operating costs of business users are further being released. However, such an exaggerated and sustained profit shrinkage needs to be noted whether the management has more detailed explanations during the conference call.

Overall, this quarter's revenue and profit of AWS business were both lower than expected again. Dolphin Analyst believes that Amazon's biggest problem has shifted from excessive investment and continuous losses in its retail sector to how low the cloud business, which is the worst performing in the recession, will decelerate, and when the profit margin will stop falling.

3. Pan-Retail Business is Struggling to Support

While AWS performance has been poor in the past, the retail business, which has been weak and not highly expected by the market since the second half of 2021, has been more resilient than expected for two consecutive quarters. Amazon's non-cloud retail revenue this quarter was $127.8 billion, a YoY increase of 6.8%, which was 3.5% higher than market expectations.

By region, the company's pan-retail business in North America grew by 13% YoY this quarter, compared to a 7% YoY growth in total retail sales in the US excluding motor vehicles in Q4, reflecting a slowdown in online shopping growth to below 10%. It can be seen that the company's North American retail business performance is significantly better than the industry and market expectations, which is consistent with our judgment that online retail will dominate in times of economic downturn.

In contrast, the company's international retail revenue declined by 8% YoY this quarter, with a revenue growth of only 5% when excluding exchange rate impact after last quarter's 12%. Although the international retail business is also about 3% higher than market expectations, it can be seen that the deterioration speed and amplitude of markets outside the US are greater, which is consistent with the trend shown in Microsoft's financial report. European and other markets may decline earlier and more severely, which will have a greater impact on companies with a higher proportion of international revenue.

Looking at the various sub-businesses under the retail business, the main source of the company's outperformance this quarter comes from the strength of third-party seller services and advertising revenue, as detailed below:

① Online self-operated retail revenue decreased by 2.3% YoY this quarter, with a decline in growth rate and a decline of 1.7% below market expectations. Self-operated retail actually performed poorly;

② The revenue of third-party seller services increased by 36.3 billion US dollars YoY, with a growth rate counter-cyclically increasing to 20%, much better than the expected 7% growth rate. According to recent media reports, Dolphin Analyst believes that the main reason for the strength of the 3P seller business this quarter is that Amazon has further increased a series of fees such as warehousing, thus increasing the realization rate.

③ The revenue growth rate of subscription services also counter-cyclically increased this quarter, growing 13.1% YoY. Dolphin Analyst believes that this is because the Prime member service has changed from a shopping website member to a comprehensive member including online streaming media, sports events and cloud gaming, and its value and attractiveness to users are steadily increasing. Additionally, the series "Lord of the Rings: The Game of Power" launched by the company this quarter was well received.

④ Other income of 12.8 billion US dollars this quarter, of which 11.6 billion came from merchant advertising services, with a growth rate of up to 18.9% YoY. Although it has slowed down, it still maintains a relatively high absolute level, and its performance is relatively strong. Dolphin Analyst believes that in times of economic downturn, merchants' advertising investment will tend to focus on e-commerce advertising with a high conversion rate, so the company's advertising business will be relatively dominant. Total revenue of Amazon reached USD 149.2 billion this quarter, a YoY increase of 9%, driven by the growth of cloud and retail businesses. Although the growth rate has slowed down, it still exceeded the upper limit of the company's guidance of USD 148 billion and far exceeded the market's expectation of the lower limit of USD 145.7 billion. The trend of the reversal of fortunes in the consumer/industrial internet sector has been basically confirmed. Fortunately, the strong performance of the 3P business revenue in the retail sector makes up for the unexpectedly low revenue of the cloud segment.

IV. The retail segment finally reduced losses

In addition to the reversal of fortunes in revenue between the retail and cloud service segments, the retail segment's performance also exceeded the market's expectation at the operating profit level. Specifically, the company achieved an overall operating profit of USD 2.7 billion this quarter, higher than the market's expectation of USD 2.5 billion. The operating profit margin was 1.8%, higher than the market's expectation, but still on a continuous downward trend.

Looking at each segment, as mentioned before, the operating profit of AWS cloud business of USD 5.2 billion was obviously lower than the expected USD 5.6 billion, and the international retail business exceeded market expectations by reducing losses to make up for AWS' deficiency. This quarter, the international retail segment achieved an operating loss of USD 2.2 billion, far less than the market's expected USD 2.78 billion loss. The loss rate decreased from 8.9% in the previous quarter to 6.5%. The North American retail segment lost USD 240 million, and the loss decreased from USD 410 million in the previous quarter, indicating that the problem of continued losses in the retail segment is improving under the company's initiative to reduce staff, increase prices, and improve efficiency.

From a cost and expense perspective, 1) this quarter's gross profit margin was 42.6%, a YoY increase of 1.9pct, and a larger increase than the 1.5pct increase in the previous quarter. Dolphin Analyst believes that the proportion of high-gross-margin businesses such as retail 3P business and cloud business will continue to drive the overall gross profit margin of the company upwards.

From an expense perspective, with the company's certain degree of staff reduction and the recovery of logistics and compliance efficiency, the proportion of compliance costs to revenue has also improved this quarter, decreasing by 0.8pct to 15.5% YoY, approaching the normal level before the pandemic. Dolphin Analyst believes that as the company addresses the problem of excessive logistic expansion and the eradication of the pandemic's impact on compliance, the company's compliance rate will return to a long-term slow decline trend. However, the company's sales and technology & content expenses are still high, with a technology & content expense rate as high as 14%, still far above the pre-epidemic level of about 10%. Dolphin Analyst believes that the company's heavy investment in AWS business, as well as investment in the film and match programs of Prime membership services, are the main reasons for cost expansion. In addition, the rise in engineer salaries and server costs is also a factor. Market expenses also increased by 0.7pct year-on-year to 8.6%, higher than the pre-epidemic level of less than 6%. The company has stated that due to the expansion of the AWS business, it has increased investment in sales and customer service, which may be the reason for the increase in sales expense ratio.

However, the company has recently laid off more than 10,000 employees again, and with the deterioration of the economic environment, the management is gradually reducing investment. Fixed asset investment this quarter was RMB 15.4 billion, which is still considerable in absolute terms, but a year-on-year decrease of 6%, the first contraction since the investment expansion cycle in 2020.

Previous research reports on Amazon by Dolphin Research:

Financial report reviews

October 26, 2022, conference call "Can Microsoft survive the economic downturn? (1Q23 conference call minutes)"

October 26, 2022, financial report review "No one can be immune to cycles, and Microsoft can't hold on either"

July 29, 2022, conference call "Capital investment will continue to grow, but Amazon will be more cautious (conference call minutes)"

July 29, 2022, financial report review "With an iron fist, layoffs of 100,000 people, Amazon finally 'bleeds back'" 2022 年 4 月 29 日电话会《Amazon Conference Call Summary: US Giants Also Talk About Reducing Costs and Increasing Efficiency》

2022 年 4 月 29 日财报点评《Inflation “Eating Up” Profits, AWS Can't Save Amazon This Time》

2022 年 2 月 4 日电话会《Amazon Is Moving Forward Despite Market Fluctuation (Conference Call Summary)》

2022 年 2 月 4 日财报点评《AWS Saves the Day as Amazon Survives the Storm》

Deep Research

2022 年 5 月 30 日《Facing Strong Headwinds in the Macro Environment, Amazon Can't Even Hide in the Cloud》

2021 年 12 月 3 日《Both Not Profitable, Why Is Amazon More Favorable Than Alibaba?》

Risk Disclosure and Declaration of This Article: Dolphin Analyst Disclaimer and General Disclosure