Andy Jassy first joined Amazon (AMZN, Financial) back in 1997, just a few years after its founding in 1994. Thus, despite not being the founder of Amazon, he has been pne of its main leaders over the past few decades. Therefore, it was not a surprise to me, that Jeff Bezos asked Jassy to take over the reins in July 2021.
The past couple of years have been tough for Amazon after a Covid-related boom and bust in e-commerce demand, coupled with rising fulfillment costs and a falling stock price. This has not been the best environment for Jassy’s first few years of tenure. Where will Amazon go from here? In this article, I break down Jassy’s lengthy shareholder letter for the year of 2022. This letter provides perspective on how far Amazon has come and the difficult trade-offs made, which hopefully gives reassurance to investors; let’s dive in.
Amazon’s evolution
Amazon reported just $15 million in revenue in 1996 and was a books-only retailer initially. In 1997, at IPO, its revenue grew by a blistering 838% to $147.8 million and the business served over 1.5 million customers. Many people would have deemed Amazon a “successful” company back then, but Bezos had an incredible vision and much bigger dreams. In his 1997 shareholder letter cited by Jassy, Bezos stated:
“This is Day 1 for the Internet…online commerce saves customers money and precious time. Tomorrow, through personalization, online commerce will accelerate the very process of discovery.”
By the year 2000, Amazon had expanded into almost every major category, becoming the “everything store” and taking advantage of the long tail of product offerings. Its third-party marketplace was also introduced in that same year, which today accounts for ~60% of its unit sales.
These were all fantastic achievements, but the real “growth engine” of Amazon (by revenue growth and earnings) has been Amazon Web Services (AWS), which was an early mover in Cloud infrastructure, which is basically computing power as a service.
Jassy reportedly brought the idea to Bezos back in 2003, and its future success “was not obvious” at the time. Jassy led the first team of 57 people and AWS' first service was launched in 2006. This gave the company a first-mover advantage over other companies such as Alphabet's (GOOG, Financial)(GOOGL, Financial) Google, which launched its Cloud service in 2008, and Microsoft (MSFT, Financial), which launched Azure in 2010. Today, AWS is the worldwide market leader with ~34% market share and ~$60 billion in revenue, according to data from Statista. Jassy led AWS as the senior vice prisident and then CEO up until 2021.
Near-death experiences
Amazon has not had an easy ride to the top. The dot-com crash of 2001 put many internet companies out of business and Amazon had to secure letters of credit in order to purchase inventory.
During the Financial Crisis of 2008, Amazon was in a tough spot but still decided to invest heavily in AWS, which was questioned heavily by “voices inside and outside of the company." This was justified as many thought it was not aligned for a retailer to be investing such substantial amounts into Cloud computing, but Bezos (and Jassy) had a larger vision and knew they were “inventing something special."
“Change is always around the corner,” said Jassy. He believes that “when you see it coming, you have to embrace it” in order to be successful long term.
Overcoming challenges in 2022
Jassy and his management team have taken a “deep look” across the company “business by business” and “invention by invention" in response to the company's current challenges.
This premortem has really been done to confirm the “conviction” Amazon has about the “long-term potential” of each initiative to drive revenue, operating income and free cash flow.
The result of this has been a shuttering of certain businesses such as its physical stores (4-star and bookstores), Amazon Fabric and Amazon Care. A negative of this restructuring has been the layoff of 27,000 employees.
Improving profitability
Profitability has been a major challenge for Amazon over the past year as its fulfillment network costs rose substantially and Amazon invested aggressively in doubling its footprint of facilities. A positive is this was actually for a good reason as Amazon’s revenue jumped from $245 billion in 2019 to $434 billion in 2022.
In order to improve the efficiency of its fulfillment network, Amazon has analyzed “every process path” and scored “productivity gains” and “cost reductions,” according to Jassy.
An example of a change that was made in 2022 was the transformation from a national fulfillment network to a more “regionalized network model." Each region operates in a largely “self-sufficient way” and thus aims to reduce shipping costs through optimized inventory placement, governed by Machine Learning Algorithms.
An extra benefit of this is Amazon is “on track” to have its “fastest Prime delivery speeds ever” in 2023. Jassy believes healthy operating margins will also come to fruition.
AWS growth potential
AWS is the main growth engine of Amazon and currently has a $85 billion annualized revenue run rate. Jassy believes AWS is “still early in its adoption curve," as 90% of global IT spending is still on-premises, and thus hasn’t migrated to the Cloud yet.
However, Jassy does admit the segment is facing “short-term headwinds” as companies are being more cautious with excess spending due to the macroeconomic environment.
Jassy’s approach to running this business is to take a long-term outlook of building relationships with its customers. Thus, rather than trying to “squeeze” every customer, AWS is actively helping customers to “optimize their AWS spend."
The company has also continued to innovate its platform and launched 3,300 new features and services in 2022. This includes Amazon BedRock, which helps to make generative artificial intelligence (AI) models more accessible to the average person.
Amazon has also developed it own CPU processor (Graviton) its 2nd generation of this chip offers 40% better price and performance compared to prior models. While its third generation (Graviton3 chips) launched in 2022, offer 25% greater performance than prior models.
In 2022, Amazon also launched its first Machine Learning training chip called Trainium, which is ~140% faster than GPU-based instances at up to a 70% lower cost. This is an immense achievement and effectively means Amazon could disrupt Nvidia (NVDA, Financial), which has been dominating the GPU market and specializes in the building blocks of AI models.
Advertising business potential
Amazon’s advertising revenue increased by a rapid 25% year over year in 2022 on a $31 billion base. The core of its product is its Amazon Marketing Cloud, which enables advertisers to select a custom audience and run analytics. The platform seamlessly integrates with AWS to enable secure storage and transfer of data. Jassy also hinted at the integration of advertising into Amazon's video, live sports, audio and even grocery products.
Final thoughts
Jassy has tough challenges ahead at the helm of Amazon, but with the exception of Bezos, I believe he looks to be the best man for the job due to his credibility building AWS and lengthy tenure at Amazon.
Jassy ends his letter with two simple but powerful statistics. The first is that ~80% of global retail is still done offline in traditional brick and mortar retail stores, and thus e-commerce still looks to have room to grow. The second is that ~90% of worldwide IT spending is still related to on-premise hardware, and thus the Cloud industry has huge potential.
If Amazon can continue to embody its core principles of “customer obsession” and “invent and simplify," I believe the company is likely to continue to thrive in the years to come.
