Amazon ‘looking at every nook and cranny’ to improve efficiencies, analyst says

CFRA Research Senior Equity Analyst Arun Sundaram joins Yahoo Finance Live to discuss Amazon’s additional job cuts, cost-cutting efforts, tech sector gloom, and the outlook for Amazon.

Video Transcript

JULIE HYMAN: We want to get more analysis of this Amazon job cut story. And not just that, the bigger picture for the company. Arun Sundaram is a senior equity analyst at CFRA Research. He maintains a buy rating on the shares in the wake of this announcement. Arun, thank you for being here.

What does this tell us about Andy Jassy's leadership? I mean, yes, I know this is happening at other tech companies. But is this a referendum? Is this any kind of commentary on how he's been doing?

ARUN SUNDARAM: Yeah, you know, I think Andy Jassy took over Amazon at a pretty tough time. It was, I think, July of 2021 when Jeff Bezos announced this transition here. And you know, it was short-- probably around three, four months after that announcement is when the macro environment started to go, you know, a bit more south, so.

And now, Andy Jassy is coming in. And the strategy is really changing. It's-- previously it was a "grow at all cost" model. And now, the strategy has shifted to a "grow at a more profitable rate" model. And that's exactly what we're seeing happening today.

You know, 27,000 total announced job cuts. That's just one lever of these efficiency announcements that Amazon is announcing. They're also, you know, cutting some of their unprofitable businesses. they're-- you know, we heard the announcement that they were pausing their construction of their headquarters here in Virginia. you know, they're really looking at every nook and cranny to try to improve efficiencies and try to become profitable.

Because you have to realize that even though Amazon grew massively over the past few years, they haven't been able to grow profitably. Their ecommerce business-- the last time that ecommerce business posted a profit was Q3 of 2021. And the last time the international business posted a profit was Q2 of 2021. So it's been a few years since Amazon has been profitable in those businesses. It's really AWS that was really lifting Amazon over the past few years. But now, we're also seeing AWS growth slow. So that's why these tough decisions have to be made.

BRAD SMITH: You know, Arun, within this effort to improve efficiency and really drive more profitability, I wonder where they're going to be looking across other elements of the business to decide where they need to do even more trimming or where they reprioritize or reallocate the capital or even the human assets that they can put towards it.

And I think no further than, you know, something that I wouldn't have known about it unless Rod Breslau, who is known as Slasher in the gaming community, had flagged it to me via Twitter, saying that the Twitch cofounder Emmett Shear is stepping down as the CEO. And then they also announced 400 people are gonna be laid off within the Twitch subdivision of Amazon. So what does that signal about where they are going to do more of the improvement of efficiency and in order to get some of the profitability that you're looking for?

ARUN SUNDARAM: Yeah, no, I think you have to realize that Amazon has a massive ecosystem of so many different products and services. Some of which most investors don't even know about. And that's why it's tougher and it takes a longer process to really flesh out all this-- this whole new cost-cutting strategy.

It takes time to go through different departments in Amazon to determine, you know, which ones do we still want to invest in, which areas do we want to cut back? And that's why I think we're seeing these different waves of job cuts announcements.

The first one, I think, was back in November. Then we saw another round in January. And yesterday was the latest round. And this latest round is a little bit more significant because it is including some of Amazon's more profitable departments, namely AWS and their advertising business. But as you mentioned, also Twitch as well.

You know, I think another point I'll make is that Amazon does spend billions of each year placing bets on certain businesses that may never become profitable. And I think this year, especially in light of the current macro environment, they're gonna be placing less bets on those kind of businesses and allocating more of the resources to their core business, and especially to the businesses that should grow profitably this year.

Mainly, I'm thinking that ecommerce side because, like I said, ecommerce hasn't been profitable for several years now. I still don't think we know the true profit potential for ecommerce. But I think this year, we'll likely see the start of that path to profitability. And longer term, I think the margins could be attractive in ecommerce, but that will be more of a 2024, 2025 story.

JULIE HYMAN: Arun, do you think this is it? Do you think that there are gonna be more cuts? Not just from Amazon, but I imagine you track some of these other ecommerce and tech plays. Do you think there's gonna be more waves of cuts as the year goes on?

ARUN SUNDARAM: Potentially. I think there could be more waves of cuts, especially if the macro environment continues to go south. We've seen the volatility in the market recently, especially in light of what's happening to the regional banking space. I think that place is more risk of a recession later this year. And if that happens, I think we could see more job cuts throughout the internet retail space.

You know, I cover companies like Amazon, Chewy, Wayfair, Etsy, many of them have already announced job cuts. But if consumer spending starts to really fall maybe potentially in the second half of this year and demand really starts to fall, I think we could see more job cuts throughout the space.

BRAD SMITH: If Andy Jassy is truly as, kind of, concerned or most prioritizing, at least, the most profitable elements of the business. What does that mean for the Amazon Prime entertainment side of their business where you're talking about massive content spends in order to try and pull people back into the Prime ecosystem on the hopes that they would spend more, even if they are on a household level, trying to trim some of their own costs as well.

ARUN SUNDARAM: Yeah, no, that's a good point. I think-- I think there are going to be areas where Amazon will continue to invest this year. And I think Amazon Prime is one of those examples. They've already put, you know, a massive investment in that space. You've heard about some of their originals that they've introduced last year.

They had the deal with Thursday Night Football. That was a major deal, a costly deal. So I think they'll continue to invest in Amazon Prime, Prime Video especially because that helps boost their entire ecommerce ecosystem. There are also other areas, I think, Amazon will continue to invest in.

Health care is another example. You know, they just closed on the One Medical acquisition about a month ago. And it seems like they're, you know, heavily invested in the health care space and trying to disrupt the US health care sector. So those are just two areas, two examples of investments I think will continue and Amazon for 2023.

JULIE HYMAN: And it's so sprawling that I had momentarily forgotten about the health care stuff, Arun. Thanks for the reminder. Arun Sundaram of CFRA, thanks so much for joining us this morning to break down what's going on with Amazon.