2022 Theme: Amazon Flexes Versus Inflation: How The Seattle Giant Makes It Work
Shopify might be continuing to struggle with a radically different business environment. It isn't alone. Old fashioned mega retailers like Walmart or Target have also had a tough time of it recently.
There are exceptions however. And they are interesting not purely because their stock is hanging in there but also because of what their approach says about what works in this economic world.
While others flail amid the push of high inflation and pull of slower growth, Amazon, for instance, is crafting a very different course.
To start at the beginning, the Seattle giant also had its quarterly earnings this week and here is how the market reacted to the numbers:
The stock climbed ~13% after its latest revenues became public which is not a trivial amount for a company of its size. It added well over $150 billion in market cap as a result.
To put it rather crudely, that is half a Walmart or four Shopifys. i.e.: not small.
The reason?
Well, Amazon continues to demonstrate that it is first and foremost a technology company, not a retailing one and there is some real value in the difference.
Why?
Well, for one thing, a lot of the strength for Amazon, especially when its retail operations struggle, has come from their cloud computing business.
That business is still very strong.
Sales at Amazon Web Services leapt 33% to $19.74 billion from a year earlier, well above the $19.56 billion expected by Wall Street analysts.
So despite consumers buying less, as they might be expected to in an era of high inflation and slowing growth, there are other business lines to buttress that decline.
But what seems to have captivated those same analysts and investors attention was a key difference between Amazon and other mega-retail operations.
Namely, the fact that they make a lot of money from third party sellers.
The value of this business line is two fold.
They make a lot of revenue selling services, in effect, to other retailers. This is very similar to Shopify!
And it means that they have more products and they have to carry far, far less inventory. This allows them to avoid some of the problems that beset other retailers during either downturns or shifts in business.
That has been the challenge for other retailers that have been caught out by the sudden shift in consumer behavior - from pandemic-type buying patterns to the recovery, move into services and "roaring summer 2022" purchases we see today.
On Amazon, if tastes move away from home decor and office items and in with the party and entertaining supplies it can happen overnight. It will simply be a different subset of third retailers fulfilling orders.
This sudden shift in shopping trends has caught out a lot of retailers. This includes very large and sophisticated logistics operations like Walmart that have been frustrated to see Covid-era supply chain and shipping-delayed items finally arrive only to have shoppers ignore them. Or have consumers struggle with reduced purchasing power and shift their spending on services.
Even the largest retailer like Walmart can only carry around 100,000 discrete items at a time. That isn't the case for a company like Amazon.
Here is a good synopsis of the recent (disappointing) Walmart earnings.
There were other highlights as well. Amazon continues to make money from ads and is apparently not suffering as other advertisers are.
Even better, prime memberships jumped by 14% this past quarter. This both surprised investors and reversed recent trends.
Nothing impresses investors more than growing subscription revenues in an era where they expect the opposite. Subscription revenues, whether it be for Netflix or Barkbox or Amazon Prime demonstrates consumers' affinity for a brand and are stickier than other forms of custom.
So, all of this meant that, despite a 4% fall in online retailing revenue (in line with other retailers) investors were newly impressed by a company that can make money in a myriad number of ways and, most especially, avoid the pitfalls that befall their competitors.
Nothing shines like avoiding being dragged down into the inflationary mud like the others.
Here is perhaps the best proof: Amazon vs Shopify vs Walmart over the last month as all three companies reported earnings:
Talk about diverging fortunes....
Amazon may be a Seattle company returning to form but elsewhere in the Emerald City things are going from bad to, well, still bad!
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