Amazon’s ‘growth story still intact’ for investors, analyst says

CFRA Analyst Arun Sundaram joins Yahoo Finance Live to discuss Amazon CEO Andy Jassy’s annual shareholder letter, the e-commerce giant’s cost-cutting plans, layoffs, and the outlook for Amazon’s growth.

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- The world according to Andy-- not Jeff, Andy. Amazon CEO Andy Jassy out with this letter to shareholders, defending the company's move to cut more than 27,000 jobs, shutter physical stores, and even setting what he calls short-term headwinds facing its key cloud computing unit AWS. Here with more is Arun Sundaram, CFRA analyst who covers the stock. Arun, thanks for being here. What stood out to you from this letter? I just want to get your sort of big picture view, first of all, as to kind of what stood out to you, what surprised you, what gave you some insight into what's going on at the company.

ARUN SUNDARAM: Yeah, yeah. I mean, I think overall the letter really confirmed our thoughts for 2023. As Andy Jassy said in the letter, the macro environment continues to be challenging, but really what Amazon is focused on is the controllables. That's really what they can do right now. And a lot of those controllables is about cutting costs, improving efficiencies-- not just through layoffs, which is probably the most publicized cost-cutting measure, but also trying to improve fulfillment speeds, lower the cost of fulfillment, improving delivery speeds.

I think what was most surprising maybe though to some investors is that Amazon did continue to state that they will continue to invest in their business. They're still investing for the next pillar of growth as they say, whether that's international expansion, the grocery space, health care, or even Project Kuiper, which is their low-orbit satellite business that they're trying to roll out to bring broadband internet to underserved parts of the world. But you know, these are big bets Amazon's making. And while not every big bet will turn out to be successful, it only takes one or two to really establish that next pillar of growth, which is what Amazon did back in the 2000s with AWS. And that turned out to be a successful investment.

- Arun, even as you were reminding of the mention of Amazon saying within this letter, or Andy Jassy saying within this letter that we're going to continue to invest in our business, it made me have the same natural reaction of like, all right, well, which one? Which one is going to receive the most investment? Is Amazon still a growth story for investors?

ARUN SUNDARAM: Yeah, certainly. We think Amazon still-- the growth story is still intact. Like I said, this year is really more on macro headwinds slowing the business. But once these macro headwinds abate, I think we'll see Amazon's growth reaccelerate.

As Andy Jassy said in the shareholder letter, two of the biggest opportunities in front of Amazon, it's still e-commerce and cloud computing. He reminded us that 80% of all global retail spending is still in physical stores and that 90% of global IT spending is still on premise as opposed to the cloud. So as these equations flip, as he says, so should Amazon's growth. And that's still-- the two largest opportunities are still e-commerce and cloud computing businesses. The rest, everything else, is still-- I bucket them into those big bets bucket.

- Yeah, definitely. And that stood out to me too when he talked about that it's not-- hasn't reached its potential yet. Zeroing in on AWS for a second, some of what he said at AWS seemed to signal that maybe, you know, like they have classically done in the retail business, maybe they're going to give up a little bit on the margins, right? Talking about that they're keeping the eye on long-term growth, helping their clients with cost optimization. Did you read that that way? What kind of-- what was your takeaway from that AWS commentary?

ARUN SUNDARAM: Yeah. No, that commentary was consistent with what Andy Jassy and Amazon's been saying for a few quarters now. You know, AWS isn't going to grow in that really attractive 30% growth rate that we've been seeing over the past few years, especially now that the macro environment is slowing. You know, we see AWS growing in the mid-teen percentage range this year, which is still good, but it is a pretty significant deceleration from that 30% clip that it's been running at.

But you know, like I said before, Amazon's really working or trying to focus on the controllables. So they are going to its customers and trying to lower costs for its customers. The good news is that Amazon isn't losing AWS customers. Instead, it's working with its existing customers to try to lower their costs.

So that's going to have an impact on the top line, as well as margins. But right now Amazon's really focused on developing those relationships with its customers, these long-term relationships, so that they continue to stick around and continue to use AWS. That's why we believe once this macro environment improves, I think we'll start to see AWS growth reaccelerate. Typically, once we exit these kind of macro downturns, that's typically when you see more cloud adoption. And like I said before, cloud adoption is still very much underpenetrated. So I think as we exit this economic downturn, we'll start to see cloud adoption reaccelerate.

- Yeah. And during downturns or during periods, that's typically when companies like Amazon with more cash to throw around invest in some of the next legs of growth for them. And particularly, you brought up Project Kuiper, so I just want to go in that direction. Is it viable to think of Amazon as a competitor or major player in the communication services or the connectivity landscape?

ARUN SUNDARAM: I think it's still a long shot, but, again, this is another big bet they are making. These low-orbit satellites, the goal is to bring broadband internet to different parts of the-- to the world. That's not only going to help consumers around the world, but it's also going to help Amazon. They need better infrastructure in certain countries in order to even introduce their e-commerce business there or even introduce AWS in certain parts of the country. So it's really a win-win situation.

But they're still very much in the early stages of these kind of businesses. Like I said, some of these bets end up working. Some of them don't. But all it takes is really one big, successful investment to really establish that next pillar of growth for Amazon.

- Just lastly while we have you, Arun, Alibaba, of course, breaking up its division for far different-- or its business into different divisions for far different reasons as well. But for Amazon, would they benefit from offloading or at least spinning off certain parts of their business into their own entities at least while they are big bets, or on the other side of that because it is a stable business and it could be a standalone by itself?

ARUN SUNDARAM: I mean, AWS could certainly be a standalone business, but I don't see Amazon spinning off that business. AWS really does complement Amazon's other businesses. It complements their e-commerce business. It actually complements their advertising business. They're allowed to integrate AWS into their marketing and advertising platform to help advertisers on Amazon, so. And it's really-- AWS is the strongest pillar of growth right now for the company as well. So I think they'll continue to keep that business intact.

- Fair, fair. All right, Arun Sundaram, who is the CFRA analyst, joining us here to talk all things Amazon and Andy Jassy's letter-- really exciting analysis. We appreciate it here. Arun, thanks so much.

ARUN SUNDARAM: Thank you.