The Amazon Flywheel Is In Full Effect

We doubled the size of our fulfillment center network in 18 months and built out a last mile transportation network, the size of UPS in 18 months

February 04, 2024

The Amazon flywheel was in full effect again this quarter. 

Total revenues increased 14%, operating income increased 386%, and Earnings per share increased 500%.  Trailing 12-month free cash flow was $36.8B vs $-11.5B in 4Q22.

In the 2Q Call, Andy Jassy, CEO, described Amazon’s regionalization benefit to its logistics network.  The two benefits are 1) faster shipping times, and 2) lower costs. 

On the 4Q call, Andy elaborated on how the Company plans to continuously improve its logistics.

We doubled the size of our fulfillment center network in 18 months and built out a last mile transportation network, the size of UPS in 18 months.  It was disruptive to get that optimized.

But one of the things that was very useful was, it caused us to relook at everything we were doing with the fulfillment network. We looked at it from a beginner’s eye and have found so many areas that we believe we can evolve that I think will both help our cost to serve and, even more importantly, deliver faster delivery speeds for customers. And I mentioned one area which, in particular, which you’ll see us focus on over the next year or two is just, we think there are real opportunities in our inbound network and our inbound processes. And then where we locate inventory in association with that, which will accomplish both of those tasks. But for us, I do not believe that we believe that 2018 is the North Star in cost to serve.

We believe we can keep evolving it and being better than that.

The doubling of the network has pressured margins as Amazon’s fulfillment costs increased much faster than product sales.  As management works to improve efficiency in its logistics, margins have considerable room for improvement.

Shipping costs have soared with faster delivery times. 

The offset to margins is faster revenue growth and share gains in the US E-commerce and against brick-and-mortar competitor Walmart USA.

Despite higher logistic costs, North American operating margins have made a remarkable turnaround.  AWS improvement is an important component (see below).  The growth in advertising ($58 billion annual run-rate) is also important as this high-margin business has become an important contributor to the business P&L and a dominant force in the advertising ecosystem.

Amazon Web Services (AWS)

AWS growth bottomed out in 3Q and accelerated in 4Q.  Workload optimization has peaked, and AI workloads are growing.  I expect AWS growth to accelerate in 2024 (Why Cloud Workloads Will Accelerate in 2024).  Operating efficiencies are also evident in the significant AWS margin improvement.

Thanks for reading!