In an open letter, Bernstein analysts have called upon Amazon board and CEO Andy Jassy to stop chasing too many ideas and instead focus on a select few.
While Amazon stock has gained almost 50% this year and is outperforming the Nasdaq, the stock has underperformed tech peers over the three- and five-year periods.
In his note, Bernstein analyst Mark Shmulik wrote: “Today we’re clearly optimistic about the road ahead — we have upgraded Amazon to our best investment idea in Internet — but believe that there’s a significant amount of self-help Amazon can take to quell investor concerns around the current investment strategy and investor communications, and together could propel the stock into the $180-200 range.”
Bernstein writes an “open letter” to Amazon
While Shmulik said that “We fully support Amazon’s efforts to uncover and capture the next AWS-sized opportunity,” he added that added, that the company is “simply pursuing too many ideas, with weaker ideas taking away the oxygen, capital, and most importantly focus from the truly disruptive initiatives that ‘only Amazon can do.’”
He said that the research firm’s meeting with investors reveals that they are also disappointed with the company’s performance.
AMZN stock underperformed in 2021 and 2022
Amazon stock fell almost 50% last year and was the third worst-performing FAANG stock of the year. It was barely in the green in 2021 and underperformed the FAANG peers by a wide margin.
In 2021, Amazon looked set to become a $2 trillion company but last year, its market cap fell even below $1 trillion. It became the first company ever to lose $1 trillion in market cap. Apple too joined it on the dubious list after the stock crashed on the first trading day of 2023.
Bernstein asks key questions of Amazon
In the letter, Bernstein said, “We get investor questions today asking ‘is AWS in last place in AI?’, ‘is retail actually a profitable business? ‘, and even ‘do we want Andy on the earnings call?’”
The letter added, “It points to one underlying issue: Amazon doesn’t own its own narrative.”
Notably, Jassy, who headed Amazon’s AWS business took over as the CEO in mid-2021. Amazon stock has underperformed the markets under Jassy but the price action can’t be solely attributed to his leadership – if at all.
US e-commerce spending has sagged after a spike during the COVID-19 pandemic while AWS is also battling slowing growth. The entire stay-at-home pack is now witnessing slowing growth and Amazon is no exception.
AMZN’s revenue growth has sagged
Amazon reported revenues of $127.4 billion in the first quarter of 2023 which was 9% higher YoY. Far from reporting strong double-digit growth, Amazon’s topline growth is now down to single digits.
Last year, its revenue growth fell to 9.2% which was the lowest ever. Amazon expects its sales in the second quarter of 2023 to be between $127 billion-$133 billion which would imply a YoY growth of 5-10%. The company forecast operating income between $0-$5.5 billion for the second quarter.
While Amazon has historically posted strong free cash flows, it burnt cash in 2021 and 2022. In the first quarter of 2023, its free cash flows were a negative $3.3 billion which was nonetheless much lower than the cash outflow of $18.6 billion in the corresponding quarter last year.
AWS sales growth continues to taper down
In Q1 2023, AWS sales rose 16% YoY to $21.4 billion. It is the slowest pace of growth in the segment. Also, for the past three quarters, AWS revenue growth has fallen to new lows.
During the earnings call, Amazon CFO Brian Olsavsky said, “AWS sales and support teams continue to spend much of their time helping customers optimize AWS spend so they can weather this uncertain economy.”
He said, “As expected, customers continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions in the first quarter.”
Olsavsky warned, “We are seeing these optimizations continue into the second quarter with April revenue growth rates about 500 basis points lower than what we saw in Q1.”
Bernstein calls upon Amazon to focus on key areas
Meanwhile, Bernstein has called upon Amazon to focus on key areas. It specifically called upon the company to “divest, seek outside funding, or trim spend” in its healthcare business.
In his note, Shmulik said, “Amazon has been trying for half a decade to build ‘something’ in healthcare, but the goalposts keep moving.”
Notably, Amazon has made several healthcare acquisitions, and last year it announced the acquisition of One Medical. In 2018, the company acquired the online pharmacy PillPack.
Amazon’s healthcare initiatives failed to take off in a major way and it even had to abandon the healthcare venture Haven in which Berkshire Hathaway and JPMorgan were partners.
Bernstein also wants Amazon to relook at its Kuiper broadband business which it said “appears even more extreme as an investment area.”
Shmulik said that Amazon should follow Alphabet and put Kuiper, healthcare, and even Alexa into “Other bets”
TCI wrote an open letter to Alphabet
Incidentally, Alphabet has also faced shareholder heat over spiraling losses at its “Other bets.” Last year, TCI Fund Management wrote an open letter to Alphabet to reduce the losses in the “Other Bets” category.
It said that “The company has too many employees and the cost per employee is too high. Management should publicly disclose an EBIT margin target, substantially reduce losses in Other Bets and increase share buybacks.”
TCI also said that Alphabet should cut losses in other businesses, especially Waymo, its self-driving unit. Pointing to the shutting down of Argo AI, which was backed by Ford and Volkswagen, TCI said, “Unfortunately, enthusiasm for self-driving cars has collapsed and competitors have exited the market.”
Before TCI, Altimeter Capital wrote an open letter to Meta Platforms calling upon the company to cut its headcount and cut back on metaverse losses.
Meanwhile, in Bernstein’s case, it is not an existing shareholder but a research firm that has written the “open letter.” Incidentally, both Alphabet and Meta did implement some of the points raised by shareholders. Would Amazon also act upon Bernstein’s letter? We’ll have to wait and see.
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