Amazon’s future: Challenging and Perilous

Decline in revenue

According to Amazon's latest report, revenue for the October-December period is expected to be between $140 billion and $148 billion. However, investors had been expecting more than $155 billion, according to S&P Capital IQ. Third-quarter revenue rose 15% from a year earlier, but was slightly below Wall Street's expectations. Amazon's net income fell year-over-year to $2.9 billion from $3.2 billion a year ago, including a $1.1 billion increase in non-operating income from its stake in electric-car maker Rivian. The result is the latest in the company's traditional core business of selling products online and delivering them to customers' doorsteps. Quarterly revenue for Amazon's online store has been declining since the end of 2021. Its shares have fallen 35% since the start of the year, and the outlook is bleak.

Lost confidence of investors

Amazon last year began its biggest-ever round of job cuts that will ultimately affect 18,000 workers around the globe. The world’s largest e-commerce company, which is scheduled to report earnings on Feb 2, warned investors that fourth-quarter sales growth would be the slowest in its history. This explicitly shows that all investors should expect sluggish growth to endure.

Tight Consumption exacerbates by inflation and monetary conditions

We've seen Amazon's financials deteriorate compared to last year. Revenues are growing slowly and operating expenses are rising, illustrating that inflation and other variables are causing costs to rise. Operating income fell sharply due to higher prices. Additionally, Amazon recorded a massive $8.5 billion loss due to its investment in Rivian (RIVN). So with negative net income and a big EPS loss, we're seeing some of Amazon's numbers fall off a cliff here.

First, the company's revenue growth slowed more than expected. This dynamic means that a broad recession is imminent and likely to worsen. Consumers are softening and spending is not as strong as expected. High inflation and tight monetary conditions are the two main factors contributing to the slowdown in consumption. Additionally, we see higher costs associated with rising inflation and other variables in the operation of the equation. However, inflation is likely to persist and should continue to weigh on costs, margins and revenue for Amazon and other market-leading companies. "There's clearly a lot going on in the macroeconomic environment, and we'll balance our investments to be leaner without compromising our key long-term strategic bets," said Andy Jassy, ​​Amazon's chief executive.

We see most technology leaders struggling to maintain growth and profitable growth. Continued high inflation, tightening economic sentiment, weak consumers, and generally slowing growth should continue to weigh on revenue, margins and profitability as we develop. As a result, Amazon as a tech giant as a whole could see further declines in the coming quarters.

Federal Reserve tries hard to save Amazon

The Federal Reserve is raising interest rates, economic growth is slowing, and bellwethers like Amazon are showing weakness. Likely, the only reason we don't see a recession in early 2022 is because the Fed runs monetary policy and starts easing rather than tightening further. Now Amazon is at it again, with disappointing results and poor guidance.

In addition, many of the top companies, represented by Amazon, are showing signs of stress due to high inflation, monetary tightening, slowing growth, weak consumers and other factors. Also, despite the potential for a post-Fed rebound, stocks could soon hit new lows. A dip in 2022 would take the S&P 500/SPX (SP500) to around 3,500-3,800 at this stage, which could happen basically anytime unless the Fed changes its monetary policy stance.

Conclusion: Covid-19 resurrects Amazon

Amazon's growth is slowing, but so is the entire e-commerce industry. Its sales remained in line with pre-pandemic trend lines. In the past few years, sales on Amazon have reached 50% during the pandemic, which is about 20%-25% higher than during the pandemic; although the 22-year sales growth has hit rock bottom, it is now recovering, so, Amazon, as an e-commerce giant, still has huge development potential and prospects.

References

Cue. (2023, January 27). Amazon to sell Bay Area office complex as sales growth cools. The Straits Times. Retrieved January 27, 2023, from https://www.straitstimes.com/world/united-states/amazon-to-sell-bay-area-office-complex-as-sales-growth-cools