Amazon Stock Sinks. This Part of Its Business Could Help Shares

Friday, April 29, 2022
author picture Gabriel Martim
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Original content created by staff

If Amazon Stock Sinks This Quarter‚ This Part of Its Business Could Help Shares

If Amazon's stock sinks this quarter‚ this part of its business could be the reason. As the cash flow from operations has fallen‚ the company has struggled to meet expectations. The company's costs to promote the enterprise have more than doubled compared to pre-pandemic rates. However‚ the Cloud computing business remains a bright spot. Its revenues from cloud computing have grown 65% year over year to $5.4 billion.

Costs of shipping a container overseas have more than doubled compared to pre-pandemic rates

According to a recent survey‚ the cost of shipping a 40-foot steel container from Asia to the U.S. West Coast has risen more than double compared to pre-pandemic rates. This increase is partly the result of increased port congestion caused by the Russian invasion of Ukraine. In addition‚ China has shut down warehouses and factories‚ adding to supply chain congestion. While freight costs are already high‚ they are particularly painful for low-value bulk items that can't be shipped in a container. They account for more than six percent of a furniture manufacturer's retail price. And‚ according to Alan Murphy‚ CEO of Sea-Intelligence in Copenhagen‚ freight costs are now accounting for up to 62% of the total retail value of some furniture. The soaring demand for container transport has resulted in a shortage of vessels. The problem was made worse by the Suez Canal blockage. The container shortage caused bottlenecks at major seaports‚ which tangled up ships for days and weeks. These bottlenecks rippled through the supply chain‚ making containers scarce. According to a Danish research group‚ 695 ships would arrive more than a week late in 2021 compared to pre-pandemic rates. Global supply chains are already being affected by the coronavirus pandemic and the restrictions imposed by the global government. Many ports in the U.S. are experiencing record-breaking backlogs in freight containers. In Los Angeles and Long Beach alone‚ average monthly import container rates for 2021 are already up 18.7% compared to pre-pandemic rates. And this is before consumers start making a rash of purchases‚ which are expected to lead to a rise in container imports. The White House insists on cost-cutting measures‚ despite the fact that consumer prices in the U.S. are up 7.9% in the year to February. Inflationary pressures on shipping rates are also forcing poor households to spend greater amounts of their income on essentials. The cost of fuel is already 1.5 times higher than pre-pandemic rates‚ according to HSBC Holdings Plc. The global economy is shifting five million shipping containers from the first half of the year to the second half‚ as the pandemic has impacted cargo flows. The surge has resulted in historic port congestion and increased costs for ocean cargo shippers. With inbound cargo volumes rising in a dizzying cycle‚ the situation is only likely to worsen. Last month‚ one third of containers scheduled to arrive at the nation's largest ports failed to ship on time. Import costs for industrial supplies are rising as well. Since the beginning of the pandemic‚ costs of shipping a container from Asia to the United States have nearly tripled compared to pre-pandemic rates. This has exacerbated the shortage of raw materials and slowed the recovery of U.S. manufacturing. According to the Institute for Supply Management‚ manufacturers had difficulty expanding their imports and inventory in December‚ which resulted in a lackluster recovery.

Costs of promoting enterprise climbed 23% year over year to $7.9 billion

The rise in costs isn't the only problem for Amazon. Inflationary pressures and excess physical space added to its already high costs contributed to its additional spending. Amazon also saw a sharp increase in its costs of promoting enterprise. During the second quarter‚ the company had to cut almost 4‚000 jobs‚ reducing its workforce from almost two million to less than one million employees. While the outlook for Amazon is gloomy‚ the e-commerce giant has two thriving businesses that are fueling its growth. In the fourth quarter‚ the firm reported net sales of $116.4 billion‚ which were up 7 per cent compared to the year-ago quarter. While Amazon's earnings missed Wall Street's consensus of $116.5 billion‚ the company's promoting enterprise has been growing rapidly. In fact‚ Amazon's promoting business now accounts for more than one quarter's net sales. Its revenue from advertising was up 11% to $13.7 billion. Moreover‚ Amazon's costs of promoting enterprise grew as it grew its workforce and added technological infrastructure. The rise in these expenses reflected an increase in the costs of technological infrastructure and employee salaries. In 2020‚ the company expects these costs to decline. Further‚ it expects to reduce its expenses on research and development as it continues to grow its user base. Other expenses include the cost of sorting‚ delivery centers‚ and inventory. These expenses represent a significant portion of Amazon's cost of sales. Overall‚ the costs of promoting enterprise increased by 23% year over year to $7.9 billion in 2019. Moreover‚ Amazon's costs of selling goods increased as more sellers entered the marketplace. Amazon also had high costs for sorting‚ packaging‚ and operating delivery centers. Moreover‚ Amazon's cost of marketing consists of payroll and other related expenses. It uses various channels in marketing its products‚ including social media‚ television‚ and third-party referrals. The costs of promoting enterprise largely depend on sales growth and the type of advertising‚ competition‚ and changes in the mix of marketing channels. However‚ the costs of marketing are still relatively stable compared to its sales‚ which explains why it's easy to see why they grew at such a rapid rate. As mentioned‚ fulfillment costs are the second-largest category of operating expenses for the online retail giant. In the most recent fiscal year‚ these expenses accounted for 14.6% of net sales. While they've grown significantly in recent years‚ these expenses still only represent a fraction of the company's net sales. However‚ the costs of fulfillment continue to be a large portion of Amazon's cost structure.

Cloud computing business remains a bright spot

As the cloud market expands and the Big Three continue to consolidate‚ Amazon's cloud computing business remains a positive. Microsoft Azure and Google have reported impressive quarter-over-quarter growth‚ and both companies' cloud businesses have double-digit growth rates. Amazon's revenue‚ however‚ is a bit underwhelming‚ coming in slightly below analysts' estimates. Meanwhile‚ Microsoft's revenue per user continues to decline. Meanwhile‚ Amazon is also winning the battle for US government contracts. The company's cloud service segment now accounts for 32% of the market‚ nearly doubling Microsoft‚ which has recently ramped up its presence. While the business isn't profitable‚ analysts still see it as a key growth area‚ and the company's cloud segment is beating expectations and providing solid operating income. However‚ the cloud business is not yet as lucrative as the retail business‚ and investors should look for other opportunities. In the fourth quarter‚ Amazon Web Services added more revenue than any previous quarter. With millions of active customers‚ it is now a $51 billion annualized run rate business. AWS's success is Jassy's DNA. Analyst Jean Atelsek at 451 Research said the AWS business has been a major source of revenue for the company. Its growth has been fueled by her energy and environmental focus. For example‚ in 2008‚ Amazon bought several million servers from Rackable Systems‚ one of the pioneers of cloud-scale server designs. Following suit‚ Amazon now builds custom hardware for its data centers to improve the performance and cost of its servers. Unlike its predecessors‚ AWS has taken the route of Google and is now offering its own hardware. In short‚ the cloud platform is a win-win situation for consumers‚ businesses‚ and the planet. Last quarter‚ Amazon's cloud computing business remained a bright spot for the company. Last quarter‚ Amazon's cloud business topped $17 billion and its operating income rose 153%. While recent outages have impacted profitability‚ the cloud division is growing quickly and diversifying its offerings. However‚ it's important to keep an eye on the company's recent outages and its broader strategy to expand into more areas of growth. The cloud wave is also good news for Amazon's public cloud competitors. Those companies have an estimated $1.5 trillion in revenue and are driving the growth of another generation of public cloud behemoths. Companies such as Snowflake‚ Twilio‚ and Atlassian‚ which are all making progress in the public cloud space‚ are also benefiting from this wave. In addition to this‚ there is also the fast-growing private cloud companies‚ such as MongoDB‚ which is raising money fast and could go public within six to eight months. While the overall infrastructure of AWS has evolved dramatically‚ the speed of light continues to play a significant role in the company's architecture. In addition to clustering data centers in the same region‚ Amazon offers premium services that are located inside customer premises. Despite this‚ the company's cloud infrastructure remains underutilized. However‚ the recent quarter's revenue growth rate remains high‚ at 81 percent annually. Furthermore‚ AWS continues to invest in servers‚ storage‚ and new data centers to further improve the overall performance of its cloud computing business.