Amazon recently released its results for Q4 2022, which revealed strong revenue growth but poor earnings.
Amazon’s revenue increased to $149,204 million, significantly higher than consensus analyst estimates of $145,420 million.
Although the company’s revenue beat estimates, its earnings disappointed with only $278 million net profit for the quarter, down 90% from Q3 and down 98% year-on-year.
The trailing annual net income – a loss of $2.7 billion – marks the lowest level Amazon has delivered since its listing in 1997.
Amazon started experiencing profitability issues in 2021, and these problems have been amplified by slow economic activity in 2022, continuing to push profit margins downward.
When considering Amazon’s profitability, it becomes clear why the company is struggling.
Since Q1 2021, Amazon has started experiencing a significant contraction in its operating profit margin. In Q1 2021, its operating profit margin was at 8.17%. It has fallen to only 1.83% in Q4 of 2022.
The declining operating profit margin is a bad sign because it shows that the company’s revenue is growing slower than the operating cost.
New projects or expansions taken on by Amazon in this period have, therefore, brought in less money for the company than the costs to operate them.
The only way to counter this trend is to increase cost efficiency within operating segments or discontinue current low-profit operations.
In November 2022, Amazon announced that it would be implementing cost-cutting measures focused on improving profitability.
Since this announcement, Amazon has laid off 18,000 employees – mainly in their stores, device businesses, and human resources departments. The layoffs added an additional $640 million in severance costs in Q4.
In addition to the layoffs, Amazon discontinued many of its unprofitable services. It included its telehealth service, many call centres, and brick-and-mortar chains. It also halted warehouse rollouts.
These cost-cutting measures have pushed Amazon’s expansion into South Africa until Q3 or Q4 in 2023, which was expected to be launched in February.
The cost-cutting measures may relieve the company of many unnecessary burdens and make it more efficient and productive.
If management is successful in identifying dead spots, the company may be successful in improving its profitability.