Amazon Flywheel

October 27, 2023

The Amazon flywheel was in full effect this quarter. 

Total revenues increased 12%, operating income increased 343%, and Earnings per share increased 328%.  Trailing 12-month free cash flow was $21.4B vs $7.8B in 2Q.

Amazon has been regionalizing its logistics network.  There are two benefits, 1) faster shipping times, and 2) lower costs.  Andy Jassy’s comments from the 2Q23 call fill in the pieces:

“Central to our efforts has been the decision to transition our stores fulfillment and transportation network from one national network in the United States to a series of eight separate regions, serving smaller geographic areas. We keep a broad selection of inventory in each region, making it faster and less expensive to get those products to customers. Regionalization is working and has delivered a 20% reduction in number of touches for delivered package, a 19% reduction in miles traveled to deliver packages to customers and more than 1,000 basis point increase in deliveries fulfilled within region, which is now at 76%. This is a lot of progress.”

The proof is in the pudding.  Amazon is gaining market share not only in E-commerce but also against brick-and-mortar competitor Walmart.

Andy Jassy further explained the regionalization initiative in the 3Q23 call:

“Regional fulfillment clusters with higher local in-stock levels and optimized connections between fulfillment centers and delivery stations mean shorter distances and fewer touches to get items to customers. Shorter travel distances and fewer touches mean lower cost to serve. But perhaps most importantly, shorter distances and fewer touches mean that customers are getting their shipments faster. We remain on pace to deliver the fastest delivery speeds for Prime customers in our 29-year history.”

North America's operating margins grew not only on leverage from fulfillment optimization but also from other cost items. Both sales & marketing and G&A costs were down year over year.

Advertising

Amazon’s advertising business grew 26% at a $48 billion annual run rate.  To put the scale in perspective, Amazon advertising is 50% bigger than YouTube, and growing twice as fast. Advertising fits perfectly in the business model. Third-party sellers are a growing piece of the business, are margin accretive to the model, and need to advertise their products.

Advertising is a 30-35% operating margin business over the long term, and can easily grow at a rapid pace for many more years into the future.

Amazon Web Services (AWS)

While AWS's growth of 12% was mildly disappointing, the margin and the commentary were not.  Deals signed at September end (booked in 4Q) were greater than the entire bookings in 3Q.  The deal with Anthropic to use AWS as the infrastructure layer is an attempt to catch up to Microsoft and Open AI.  With workload optimizations slowing and AI workloads accelerating, AWS growth should accelerate in the future.  Microsoft is the clear leader in the Cloud infrastructure wars, but Amazon has laid out a clear growth strategy.  It’s still early.

Andy Jassy took a lot of criticism for a poor 2022. It is hard to follow in the footsteps of a legendary founder. However, after two very good quarters, Jassy has regained some of the lost investor trust.  Moreso, after getting stuck in the sand in 2022, the Amazon flywheel is spinning with momentum.