The ups and downs of Amazon: Investment now, rewards later
Amazon, the global tech giant which is in the final stages of completing a R4.5 billion multi-purpose complex in Cape Town to serve as the headquarters for the firm's Africa operations, has come under significant pressure over the last few months.
For the first time in almost a decade, the company reported a staggering net loss of $2.7 billion during 2022.
Tasneem Samodien, Research Analyst at Private Clients by Old Mutual Wealth, explains what led to this staggering loss, "Amazon was a major beneficiary of the surge in online shopping during the COVID-19 pandemic, achieving record-breaking e-commerce sales volumes in 2020. However, as global lockdown policies eased from mid-2021, consumers returned to physical shopping outlets, and spending on leisure and entertainment services increased. Consequently, Amazon's sales growth regressed from the highs of 2020 to early 2021, normalizing at pre-COVID levels.”
During the pandemic, Amazon, founded by billionaire Jeff Bezos, and now chaired by him, faced challenges in fulfilling its same-day delivery promise to Prime members due to overwhelming demand. To address this, the company made significant investments, doubling its fulfilment (i.e., delivery) network capacity while bolstering its Prime subscription service with additional streaming and sports content.
Although these strategic moves positioned Amazon for future growth, they impacted short-term profitability and market sentiment.
Samodien draws parallels to a similar situation in 2014, when Amazon, still under Bezos' executive leadership, made substantial investments in various areas, resulting in a decline in return on equity (ROE) and share price. Bezos emphasized the importance of experimentation and learning from failures, ultimately leading to the company's gradual improvement over time.
The company's current challenge lies in the need to invest in scale. "Now, Amazon's management team is focused on optimizing operational efficiencies, delivery routes, and fulfilment centre capacity while leveraging its scale," states Samodien.
Market analysts have questioned whether Amazon can further increase its e-commerce penetration in the US, where it currently holds a market-leading position with 14.7% e-commerce penetration.
"Despite short-term challenges, we believe that Amazon's focus on continuous improvement and strategic investments will strengthen its position in the market," says Samodien.
Amazon is part of the "Magnificent Seven," a group of large tech companies driving the global market recovery. Comprising Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, these firms have played a significant role in the current global market resurgence.
Regarding Amazon's recent net loss and negative ROE in 2022, Samodien emphasizes the need to avoid viewing ROE in isolation and to understand underlying drivers. Market declines impacted profitability for many listed companies in 2022, including Amazon's investment in electric vehicle manufacturer Rivian, which resulted in a fair value loss of US$12.7 billion.
However, Samodien cautions investors not to overlook a company's long-term growth potential based on short-term financial underperformance.
"As long-term investors," explains Samodien, "we remain confident in Amazon's prospects. The company's focus on strategic investment aligned with its vision for the future, and CEO Andy Jassy's experience and dedication to capital allocation strengthen its position as a formidable global competitor”.
Samodien concludes on an optimistic note, stating that Amazon's investments are likely to yield positive returns in the long run, adding that the recent share price weakness provided an attractive entry point for investors to gain or increase exposure to this high-quality business.
