Amazon’s cloud unit may need to pass the profit growth baton to e-commerce
Amazon needs to make more money from its retail business at a time when the bar is already high and short-attention-span consumers are looking for bigger and better bargains. Starting in 2025, “the retail business has big shoes to fill from [Amazon Web Services],” research firm MoffettNathanson wrote in a Wednesday note to investors. The analysts see Amazon adding roughly $90 billion of operating income from fiscal 2023 through fiscal year 2027. But as the profitability outlook for the AWS cloud unit eventually levels off, MoffettNathanson said the retail operations, excluding advertising revenue, will need to pick up the slack. The analysts said they think “Amazon can do it,” but it’s “going to be harder from here.” AWS has been carrying the load of adding to the company’s EBIT (earnings before interest and taxes) growth over the past several years. Since 2019, MoffettNathanson estimates AWS has generated two-thirds of the company’s profits. But with continued cost headwinds needed to support AWS growth, analysts believe Amazon’s cloud business will contribute less to overall profits. Getting more out of e-commerce may be a tall order given the cadence of the latest batch of retail earnings so far. The destinations able to deliver the best value are doing the best. Off-price retailer TJX Companies on Wednesday showed why its T.J. Maxx, Marshalls and HomeGoods chains are tops on shoppers’ lists. Amazon’s second-quarter results, released after-the-bell on Aug. 1 , were hurt by e-commerce misses, with management blaming distractions from the Olympics and presidential politics as reasons for soft guidance. AWS in the latest quarter was terrific despite heavy investment to keep up with demand. While cloud strength is a huge part of our Amazon investment thesis, we do think the company can continue to increase retail margins and add further to overall profitability. Even in its softer second quarter, Amazon was able to reduce its “cost to serve,” which is how much it costs the company to deliver a product to customers in North America on the retail side. Management reiterated that there are more gains to be had by further building out its same-day delivery network, regionalizing its inbound network , and expanding the use of automation and robotics. We see no reason to doubt the team on this score. While the stock experienced a post-earnings slide of nearly 9% on Aug. 2, we were not concerned. Ten days later, after a nasty stock market slide and then some stabilization, we added to our Amazon position in the high-$160s. Shares closed Wednesday just above $180, representing roughly a 7% increase since the trade. (Jim Cramer’s Charitable Trust is long AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
The Amazon Prime logo on a package in Manhattan.
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Amazon needs to make more money from its retail business at a time when the bar is already high and short-attention-span consumers are looking for bigger and better bargains.