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Amazon: Revenue Growth Shifting from Product Sales to User Monetization

Thomas Paulson
Jul 29, 2022
Amazon: Revenue Growth Shifting from Product Sales to User Monetization

  • Always zigging when others are zagging, Amazon surprised Wall Street with an outlook for faster 3Q22 revenue growth (adjusted for foreign currency) at +17%-21% compared to +10% in 2Q22 and versus market expectations calling for deceleration given persistent macro fears.
  • When asked about the economy, a consumer pullback, and excess inventory at other retailers, Amazon CFO Brian Olsavsky said, "We're not seeing some of the pressures that other [retailers] are seeing right now. Our macroeconomic issues are principally on inflation and...the energy electricity rates in our data centers because of the ramp-up in natural gas prices if you've seen that...There's a certain amount of conservatism always built into this because we are in a very difficult macroeconomic state potentially [but]…it's not hit[ing] our businesses directly. In fact, we're seeing strong growth in sales through the quarter in 2Q22…and that's how we set our forward guidance."
  • Parsing through the results and the discussion above we think there are several factors behind Amazon’s stronger outlook that bridge the 9 pts of acceleration between the 3Q22 outlook and the 2Q22 reported results (+19% compared to +10%). These include: (1) Prime Day moved to 3Q from 2Q (+400 bps); (2) significant membership fee increases in big markets like the UK and Germany (+200 bps); (3) increased service fees from 3P sellers and partners; (4) easier YoY comparisons (+24% growth in 2Q21 versus +15% in 3Q21) which was partially self-inflicted; (5) consumers using Amazon to save on driving/higher fuel expense; (6) the addition of MGM for a full quarter; and (7) a "X-Factor".
  • Amazon’s X-Factor is that it’s now monetizing its audience more compared to selling more products. The number of units sold during 2Q22 was +1% versus 20% reported growth excluding AWS, Whole Foods, and 1P revenue growth. That 19-point difference reflects more monetization via advertising, higher Prime Membership rates, and higher 3P seller fees. 3Q22 likely holds more X-Factor.
  • Management has a huge incentive to get the stock price stabilized and moving upward again in order to make its stock-based comp more tangible in an effort to secure employees from its competitor’s pouching efforts. (Amazon’s SEC disclosures point to a very large number of option forfeitures in 2Q22, which indicates substantial employee departures, and a very large number of grants, which indicate increased retention offers, as well as new hires.)
  • Olsavsky also shared, "2Q22 includ[ed] quarter-over-quarter improvements in delivery speed and inventory in-stock levels. We have also moved quickly to adjust our staffing levels and improved the efficiency of our significantly expanded operations network." On future fulfillment and shipping capacity, he stated, "We've continued to moderate our build expectations to better align with customer demand. We expect the fulfillment and transportation dollars spent on capital projects to be lower in 2022 [than 2021].
    If the business is running better and the consumer demand is there, productivity will be on the rise. Faster revenue growth and higher productivity will drive margins, which is the path to driving the stock price higher. Things go poorly for retailers when inventory levels are too high and stores/employees are too many. When these begin to remediate, things can turn upward. Recent examples include Target, Walmart, and Lowe’s, all of which had strong upturns beginning in 2019.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more.

He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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