Amazon’s outlook disappoints as customer budgets stay tight

Amazon.com Inc on Thursday said its operating profit could fall to zero in the current quarter as savings from layoffs do not make up for the financial impact of consumers and cloud customers clamping down on spending.

And even while Amazon’s holiday revenue beat Wall Street’s expectations, the company expects sales growth in its long lucrative cloud to slow for the next few quarters, its chief financial officer told reporters.

Shares fell 2 percent in after-hours trade, after they had gained 7 percent before the market’s close Thursday.

Facing high inflation and an uncertain economy, Amazon has aimed to slash costs across its vast array of businesses.

Last month, the online retailer said more than 18,000 employees particularly in its commerce and human resources divisions would lose their jobs. It booked a $640 million severance charge in the fourth quarter, CFO Brian Olsavsky told reporters.

Amazon likewise has scaled back or shut down entire services like its virtual primary care offering for employers. It took another $720 million charge from closing or impairing assets of some grocery stores, among other items, despite Amazon’s long-running bet on supermarkets for revenue growth.

Despite aggressive cost-cutting, Amazon forecast it would earn between $0 and $4 billion in operating income this quarter, compared with $3.7 billion in the same period a year prior and $4.04 billion that analysts were expecting, according to research firm FactSet.

Olsavsky attributed this to sales growth easing in the cloud as Amazon works with budget-conscious businesses to reduce their costs, as well as brands pouring money into Amazon ads more slowly now that the holiday shopping season is over.

Retail demand is another factor.

“We remain nervous as everyone else is about the consumer spending and… how people will prioritize their budgets moving forward,” he said.

Value shopping

An October sale to encourage early holiday shopping on Amazon has helped with retail revenue, to a point.

The company’s total net sales were $149.20 billion in the fourth quarter, compared with analysts’ expectations of $145.42 billion, according to IBES data from Refinitiv.

Consumer spending, however, shifted more to value brands in some categories and a greater percentage of sales in home essentials, Olsavsky said.

Demand in Europe and the United Kingdom was also hurt by high inflation and the Ukraine war, lowering growth rates there, he said.

Amazon has sought new revenue in the meanwhile. The company plans to charge certain grocery delivery fees for U.S. Prime members, on top of recent price hikes to join the loyalty program; it has created an add-on generic-drug subscription to attract business as well.

Still, its outlook is particularly tied to the fortunes of its cloud-computing division.

Andrew Lipsman, an analyst at Insider Intelligence, called slower growth in cloud and ads “a drag on profits going forward.”

Tech industry executives, including at rival Microsoft Corp have said economic uncertainty has prompted enterprises to rethink how much they’re willing to spend on cloud.

While AWS is helping customers navigate such terrain, it still has a healthy deal flow and future commitments from customers, making the company optimistic, Olsavsky said.

But for now, the division fell short of estimates of more than $22 billion in fourth-quarter cloud sales. They increased 20% to $21.4 billion.