According to the Q3 financial statement of Amazon 2022, the performance of its two core businesses, AWS and e-commerce, is quite different. The e-commerce business started to show losses in the first quarter of this year, while the cloud service business has been growing dramatically. In the third quarter, the operating profit of AWS increased by 27% year on year, 12% higher than the total profit growth of Amazon.
Reflecting market valuations, Alexander Haissl, an analyst at Redburn, even predicted that AWS could be worth $3 trillion in the future, but the reality is that Amazon as a whole is hovering around $1 trillion.
It’s an interesting change that’s worth talking about.
On the one hand, as we all know, Amazon’s core business is e-commerce, but the growth of e-commerce business is extremely slow, and even sends a signal that drags down the company’s overall revenue growth. On the other hand, the growth trend of cloud services has created considerable income for Amazon, but does it mean the end of the era of e-commerce? Mobile Internet has entered a new economic cycle.
That seems to be the case. Bezos has said publicly that “AWS is definitely going to be Amazon’s largest business in the future,” so in July of last year, Bezos intentionally left the retail empire to Andy Jessi, who has been running AWS. At the same time, this is also the core topic of today’s article: how to think about the future trajectory of Amazon?
Amazon is no longer focused on e-commerce
When it comes to global e-commerce, the person you can’t talk about more is Bezos and the retail empire he’s built. Bezos left Wall Street in 1994 to found Amazon. The original Amazon was just an online bookstore. Along with Microsoft, Apple and Intel, Amazon quickly emerged as one of the star affiliates in the golden age of the Internet.
However, the good times were short-lived. In 2012, the growth of Amazon’s e-commerce business in North America showed a lack of momentum. YOY(year-on-year growth) has been fluctuating around 25% and is on a downward trend. In terms of revenue structure, Amazon’s e-commerce business at that time could be described as weak. Fortunately, starting from the first quarter of 2015, Amazon began to disclose the financial condition of AWS in its financial results.
What no one could have predicted was that AWS, a modest new business, would become Amazon’s new engine.
For Amazon at that time, the e-commerce sector had reached a watershed. It was also the year that Amazon’s market value surpassed Walmart, once the world’s most valuable retail supermarket, for the first time. If you had bought Amazon at $15.52 at the end of 2014, congratulations. By the end of 2015, the stock would have doubled in value.
To put that in perspective, AWS net sales growth over the 2013-2015 period was 69%, 49%, and 70%, respectively, more than double the retail growth rate. Since then, AWS’s sizable operating profits have come to the fore, so much so that in 2015, Bezos wrote in a letter to shareholders, “After 10 years of growth, AWS is now bigger than Amazon was when it was 10 years old.”
If you can’t see why, there’s a more straightforward statistic. AWS’s operating profit was $521 million in the third quarter of 2015, compared with $528 million in operating profit in North America and a $56 million loss in international e-commerce. All told, AWS alone generates more revenue than Amazon makes from its e-commerce business.
Bezos was a smart man at the helm, and as AWS exploded, Amazon began to shift its focus away from e-commerce. Specifically, since 2015, sales revenue of Amazon’s e-commerce business has been compressed year by year. By last year, the proportion of revenue of retail sector (including online and offline) has been compressed to about 50%.
In other words, the past situation of Amazon relying on big cattle to pull small cars has changed, which is similar to the current domestic Internet giants seeking the second growth curve. The difference is that the former has nearly landed on the ground in terms of system construction.
