Andy Jassy: Boost Amazon Stock By Freeing Services From Products

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Last October I argued that Amazon should split into two.

Since then, its shares have fallen another 27% and they are down 35% since Andy Jassy took over as CEO.

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After announcing second quarter results that included boffo growth in its cloud and advertising services businesses while its unprofitable e-commerce business shrank, I think Amazon’s board should again consider creating two new companies: Amazon Services and Amazon Products.

Amazon Under Andy Jassy

Since taking over as CEO on July 5, 2021 Amazon’s stock has lost about 35% of its value.

Jassy has struggled to clean up the problems left by Amazon’s founder, Jeff Bezos, and new challenges that are a result of economic forces that are out of his control. These include “an ongoing labor battle, the market downturn, growing regulatory pressure, an exodus of top talent [as well as] Soaring inflation and slower consumer discretionary spending,” noted CNBC,

Jassy is what I called in my book, Goliath Strikes Back, a fast-follower CEO. As I wrote in February 2021, I saw parallels between Jassy and David Glass who followed Sam Walton as CEO of Walmart
to expand the company into groceries where it now enjoys dominant market share.

Whether Jassy can be viewed as successful depends on whether he can keep Amazon’s current businesses growing rapidly while investing in new growth opportunities — analogous to what AWS was when he helped launch it in 2006.

Until that becomes clear, a bit of bright news for Jassy is that thanks to its second quarter performance and prospects, Amazon stock is poised to pop nearly 11% when it opens for trade on July 29.

Amazon’s Q2 Performance And Prospects

Amazon lost $2 billion in the second quarter (including a $3.9 billion write down of its Rivian investment). But investors ignored that and focused on Amazon’s beat of the Q2 consensus revenue target and its optimistic guidance for the third quarter.

They crave expectations-beating growth — which the company delivered. Amazon’s second quarter revenue of $121.23 billion exceeded the consensus estimate by $2.1 billion. And it forecast third quarter revenue growth between 13% and 17%. The midpoint of its guidance range — $127.5 billion — is $1.4 billion higher than analysts were expecting, according to CNBC.

Amazon’s latest quarterly results reinforces the argument that I made last October. It is the tale of two companies: a fast-growing, profitable services business and a shrinking, money-losing online products purveyor.

The services businesses — Amazon Web Services and Advertising did well, according to CNBC:

  • AWS enjoyed 33% growth to $19.7 billion which exceeded the consensus by $140 million. AWS’s operating income of $5.7 billion accounted for all of Amazon’s profit plus some in the period
  • Advertising grew 18% to $8.76 billion — $120 million more than consensus. What’s more, Amazon’s advertising business grew faster than Google’s
    (+12%) and Meta (-1%).

Meanwhile, Amazon’s products businesses put in a more mixed performance. Amazon’s online stores segment, which includes the bulk of its e-commerce operations, suffered a 4% decline and Amazon blamed the stronger dollar —without which, online stores revenue would have been flat, according to the Wall Street Journal,

The online segment has lost money for three consecutive quarters. As the Journal wrote, “Amazon’s North America division, which houses its core online retail business in its biggest market, reported a third consecutive operating loss, though it narrowed from the prior quarter.”

Jassy summed up Amazon’s mixed performance as follows: “Despite continued inflationary pressures in fuel, energy, and transportation costs, we’re making progress on…improving the productivity of our fulfillment network. We’re also seeing accelerated revenue as we continue to make Prime even better for members, both investing in faster shipping speeds…”

Why Amazon Should Form Two New Companies

I would be excited to own shares in Amazon’s services businesses and would not want to own stock in its products businesses. More specifically, I would encourage the company to create two new ones:

  • Amazon Services — which would hold the assets of its AWS, advertising, third-party seller services (which enjoyed 9% growth in the latest quarter), and Prime Subscriptions (+10%) business lines, and
  • Amazon Products which would give investors a stake in its physical product businesses.

The reason is simple: Services is growing faster than rivals, is highly profitable, and has bright prospects. By contrast, with the exception of its small physical stores unit (+10% in the quarter), Products is shrinking, losing money, and fraught with labor and logistical challenges that are likely to defy solutions over the long run.

I will concede that splitting Amazon into two separate companies would make it slightly more challenging for the Services business to benefit from what it learns from the Product ones.

For example, Amazon’s insights into which items are popular on its third-party seller service has inspired Amazon to offer low-priced knockoffs — such as its Galen line of Allbirds-like sneakers. More importantly, AWS has no doubt benefited tremendously by developing new services to help Amazon operate its ecommerce business.

That cross-business unit sharing would not necessarily be lost were investors to have the option to own Amazon Services and/or Products. The two companies could negotiate contracts to maintain their sharing of valuable insights.

Investors crave expectations-beating growth. In my view, they would prefer to own Amazon’s double-digit, profitably growing Services unit instead of the unprofitably-shrinking Product one.

Peter CohanContributor New! Follow this author to improve your content experience. Got it!FollowOct 29, 2021,09:49am EDT Germany Is Amazon’s Second Biggest Market BRIESELANG, GERMANY – SEPTEMB
ER 04: A worker prepares packages for delivery at an Amazon warehouse … [+] GETTY IMAGES It’s time to break up Amazon. Amazon started out in life as a website that partnered with the physical world. As I wrote in my book, Goliath Strikes Back, when such partnerships fell short of Amazon’s order fulfillment targets, Amazon built warehouses and a logistics fleet to deliver goods in two or fewer days. Along the way, it also built services businesses — including Amazon Web Services, advertising, third-party seller services and Prime subscriptions — that now account for over half of its revenues and the bulk of profits. A mediocre third-quarter earnings report has left its stock — up 8.6% in 2021 — badly lagging the S&P 500’s 39% pop for the year, according to MarketWatch. Amazon’s 2021 stock price performance is way short of its 33.2% average annual increase in the decade ending 2020. PROMOTED Here’s a way to give investors a chance to get back to that market-beating stock price growth. Amazon should split into two: While this won’t solve Amazon’s fundamental growth problem, it would give investors a choice of whether to bet on Amazon’s asset-light businesses — which appeals to my tastes — or its asset-intensive ones. MORE FROMFORBES ADVIS
OR Best Tax Software Of 2022 Best Tax Software For The Self-Employed Of 2022 Income Tax Calculator: Estimate Your Taxes (I have no financial interest in the securities mentioned). Amazon’s Two Bad Quarters Under Andy Jassy Amazon founder, Jeff Bezos, handed off the CEO job to Andy Jassy at the right time. That’s because investors reward companies that beat analyst expectations for revenue and earnings growth and raise their guidance for the upcoming quarter. Good News For Investors: The Stock Market Is Embracing Inflation Now While Amazon very frequently accomplished that under Bezos’ leadership, it has missed and lowered twice in a row under Jassy. For example, in the second quarter, Jassy was in the hot seat when Amazon reported disappointing results and its stock fell 7.2%. As I wrote in July, in the second quarter, Amazon reported revenue that popped 27% — but fell a whopping $2.4 billion below analyst estimates. The real kicker was Jassy’s far less rosy — 13% revenue growth forecast — for the third quarter. This was way short of Amazon’s 10 year average revenue growth rate of 27.4%. What’s more, Amazon’s estimated revenue range of $106 billion to $112 billion was about $10 billion below the consensus estimate. On October 28, Amazon again fell short of investor expectations and forecast an even worse fourth quarter. According to CNBC, third quarter revenue rose 15% to $110.8 billion — about $810 million short of analysts surveyed by Refinitiv while earnings per share of $6.12 were 31% below expectations. Amazon forecast fourth quarter revenue growth way below analysts’ estimates. Amazon predicts revenue to rise in a range between 4% and 12%, the midpoint of which — $135 billion — is $7.2 billion short of analysts’ expectations for 13.2% growth. Amazon intends to fulfill its obligations to customers and partners by spending extra money. As Jassy told…


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