A weekly podcast with the latest e-commerce news and events. Episode 312 is breakdown of Amazon’s Q3 2023 earnings.
Amazon reported another strong quarter across the board for Q3, soundly exceeding analyst profit expectations and retail industry averages. In this episode we break down the AWS AI, Ads, and retail performance.
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Episode 312 of the Jason & Scot show was recorded on Monday, October 30, 2023.
[0:23] Welcome to the Jason and Scot show this is episode 312 being recorded on Monday October 30th right before Halloween I’m Jason retailgeek Goldberg and as usual I’m here with your co-host Scot Wingo.
[0:38] Hey Jason and welcome back to Jason and Scot show listeners Jason it’s a Halloween Eve hallow Eve but also we just watch the Mac live presentation from Apple or live presented recorded earlier presentation from Apple about new Macs, so I don’t know I think I’m going to ask you about Max first are you going to get a new Mac are you sitting out this upgrade cycle.
[1:07] I am on the fence guy of course I want one I have scheduled a meeting with my family CFO to see if I can, I can justify it so so we’ll see I did not order one tonight I’m actually.
Still super happy with my M1 MacBook Pro so so I know M3 is at least three times better so so of course I want one but we’ll see when I pull the trigger what about you is yours already on the way.
[1:38] I have been a while without an upgrade and running a little long on the tooth on this guy so yes I have a new machine coming they were actually pretty generous on the trade-ins you should just do an experiment before you talk to the CFO plug-in that trade in and see if it.
[1:56] That could be the.
[1:58] You a better presentation also if you have an Apple credit card which I’m sure you do they have a really compelling offer there.
[2:07] All right lots of lots of good good things to consider my nine-year-old has made it clear that we’re not allowed to trade anything in it.
[2:17] It’s got dibs on.
[2:20] He’s very he’s very aware of the technology trickle down.
[2:24] Oh man well you can somewhere down the stream there’s going to be one that you could trade in but I don’t think it may have as much impact as your courage.
[2:32] I I don’t know if he’s ever going to own a computer device with a keyboard will see but yeah he’s actually not that interested in my laptop.
[2:40] Speaking of baby geek or I guess now he’s I don’t know kindergarten geek.
[2:46] Third grade geek.
[2:47] Third grade geek what’s he thinking about Halloween I hear he’s kind of outgrown Star Wars which makes me casa.
[2:56] He still like Star Wars but he yeah he is not doing a Star Wars character last year he did a Pokemon character he did Pikachu and this year he’s stepped up to Charizard so that.
[3:09] Very rare.
[3:11] Enables well I think it depends on which Charizard butt.
That steps up the whole opportunity to build pyrotechnics into the costume.
[3:21] All right watch out for some evil Pokemon people that try to capture.
[3:26] Yeah I think the big debate in our house which isn’t hasn’t fully happened yet is who’s trick-or-treating with Stephen and who’s staying behind to try to scare the bejesus out of neighborhood kids.
[3:36] I’m thinking you and a gorilla suit or you could be in the last year’s Pokemon suit or Pikachu suit that could be a fun combo.
[3:45] Yeah last year I actually had knee surgery only a few days before Halloween so I won by default because I couldn’t really walk but this year I feel like I have no good excuse.
[3:56] Right as the title shows the purpose of this as we have some Amazon news to report on.
[4:02] Amazon news your margin is there opportunity.
[4:15] Well Jason it was a kind of interesting setup coming into Earth earning season this quarter the whole world was focused not on e-commerce not on marketplaces not on omni-channel not on payments some of our favorite topics but also not on ads one of your favorite topics but everyone is now obsessed with AI thanks to the success of chat Juju GPT so coming into the quarter Amazon was kind of on the backside of a lot of the other big companies so we had Microsoft come out and they did really well with AI the their partnership with open a.i. / chat gbt is bringing tons of workloads to azure.
How much is their cloud computing platform and then Google really underwhelmed everyone with what they’re doing there you know they’re they’re kind of tiptoeing it’s very clear that they don’t want to kill the Golden Goose that is Google search by putting too much AI to that so allow their experiments are in Bard which is kind of way off to the side I’ve tried barred three times I can never get it to have the features that they say it should because my corporate Google account you know either won’t have access or it says that feature is not here yet.
Um and I think people are really starting to worry about Google on this one.
So then that teed it up where all eyes were on AWS to see how are they doing and I think we’ve covered this but.
[5:44] The Amazons approach to this is to be kind of agnostic for lack of a better word so they’re kind of like hey if you want to use.
Any of these different models we’re going to basically let you run them on AWS compute and we’re going to have all kinds of different graphic Processing Unit or GPU tears available from you know their own chip set to older Nvidia chip sets to the new ones and kind of be y 0, LM bring your own large language model.
[6:18] And then oh yeah also Facebook did pretty well and you know they’re definitely through the worst of the Privacy changes that Apple put out and they have an approach to AI that is an open source one so they’re basically saying hey we’re going to integrate this in our products and what we build we’re going to put out there kind of almost scorched Earth in a way saying why don’t we just open source this thing and maybe that will slow down our competitors who are going to use this to to generate their own revenue and because they don’t have a cloud piece they don’t and they’re pure advertising it doesn’t really, Concord hurt them to do this so they’re not making Cloud Revenue off of it but it’s become a popular one and it’s called llama in case anyone is it from there then, okay so just not to leave everyone in suspense because we usually talk about AWS kind of later in the Amazon update we’re going to cover it first so the ended up having a really good ADB is showing so I would say people got kind of panicky and we’re expecting it to be down and it kind of came in line.
[7:22] But what that people excited was part of the talk track on the conference call Co jassy said that they’re winning some big AI workloads they talked about some big deals had close towards the end of the quarter that we’re pretty significant and what’s happening is as you know what’s what a i chat gbt is trained on the broader internet and anything that they can throw into there.
[7:49] And that’s interesting but what’s happening is corporations and.
Both big corporations for internal use but then also other corporations they’re wanting to train a large language model on their data and they also don’t want that data to kind of leak into the broader ecosystem so that’s that’s really benefiting Amazon because it turns out a lot of the data that companies want to train these lme’s are are already in AWS so instead of paying all this money to pull the data out of AWS and then synchronize it back into your LM as as Amazon anticipated with this kind of open bring by0 LM model.
People are bringing the LMS to them and using the data because it’s already in AWS and it’s easier for the llm to just kind of go right there and grab it versus moving the data around.
[8:44] That may not make a lot of sense so let me give you kind of a random example let’s say you’re a big added see like I’ll pick up, this one called publicist they’re out of France and most people haven’t heard of them and let’s say that that French Ad Agency wanted to save a bunch of money they could take like.
Let’s say 3:00 of content from like a podcast transcript or something like that.
And they could use that content let’s say someone of their company like a detailed digital retail payment strategy vice president general manager type person with a big crazy title like that.
They could put that data out there and run an llm on day ws and train that data on it.
The llm on that data and then they could have for example just picking something random they could have a retailgeek bye.
That was basically as good as the human probably ninety percent so good enough but you know this thing could run 24/7 you could actually you could have as many of them you could clone it on two different processors after you get through the training mode and you were in D quote-unquote inference mode and it also doesn’t take breaks it doesn’t need, Starbucks vanilla lattes constantly it doesn’t have expense reports it just.
Does its job and doesn’t complain and doesn’t ask for raises so that’s that’s a that’s a use case that something like that would work did that make.
[10:08] Specific hypothetical there Scott.
[10:11] Is randomly chosen just kind of picked it out of the are there.
[10:14] It almost sounds like the more words in your title the more vulnerable you would be to AI disruption.
[10:20] I thought about that but it is does make sense because that’s essentially more tokens for the AI to learn just like right there in your title you’re basically asking for it if you’re a robot Overlord you’re kind of picking on who to go for a first I would look for large titles person.
I don’t know I don’t know how their training these things.
[10:37] There I know you’re the investment guy in our podcast but there’s this investment theory that you don’t you don’t, be the little guy chasing the big Trend that way you want to do is identify the secondary Trend and so in this scenario as soon as it seems like a i is ready to replace the the blowhard Talking Heads everyone should short Starbucks seems like the.
[10:59] Mmm that’s a good point yeah I hadn’t thought about that.
[11:02] Yeah because when I lose my job and can’t afford those lattes I feel like something I would like I’ll take some solace in knowing that you made some money on that.
[11:14] Yeah they’ll be like on their conference call we’re still working on the data but we’ve isolated it to this to block window in Chicago and we’re pretty sure we have an idea what’s going on.
[11:26] I feel like my Starbucks footprint is a lot bigger than Chicago.
[11:29] Well you know the the core of your Bullseye answers is going around.
Okay but in all seriousness this is a really interesting blurb from the call where they talked about their strategy gaining traction and they said there’s multiple businesses are using their gen AI That’s short for gender of a i.
Apps on AWS including Adidas people in our European list listeners I think they call it a deed us but I’m here in America we call, here in South the southeast caught Adidas booking.com and United Airlines.
And while Jenny eyes Revenue contribution remains small management suggested Revenue quote compares favorably.
To some of the other leading providers and this is this is interesting because Amazon’s always mum’s on revealing anything until the SEC forces them to break out stuff like, for the longest time we didn’t know at AWS was then we didn’t know what ads were and then they became material enough they had to break them out so so Amazon under Bezos would never have said those words I’ve like even hinting about what’s going on.
[12:35] But kind of is interesting because there’s a new sheriff in town and also it shows you how important it is that they let everyone know that they are not falling behind and that their room new quote-unquote compares favorably with other other Cloud providers obviously they’re talking about Azure once Wall Street analyst I did it is back of the napkin and he kind of said all right I think that they’re telling us this is always funny because it’s like six degrees of.
You know separation so who knows but they basically inferred what they were trying to say reading the tea leaves was that it’s about a 400 million-dollar business and already two percentage points of AWS Revenue.
Which was basically zero six months ago so that’s that that is kind of an interesting thing that came out of nowhere and is already a 400 million quarterly business so that means it’s a 1.6 billion annualized run rate business.
[13:29] If they’re reading the tea leaves right on that so that was the AI part so I thought I’d be important for us to get that out because that was kind of like the new cycle really centered around that, and it is interesting you know you and I are watching this very closely there are e-commerce ramifications you know there’s all kinds of, The Innovation here is so rapid it’s hard to keep up with there’s all kinds of a eyes for creating product detail pages and you know all kinds of, e-commerce oriented support Bots and it’s just like amazing a lot of AI applications for optimizing warehouses it’s just like overwhelming how much is out there we’re definitely in the, tippy top of the hype curve and you know a lot of businesses are still sorting through all this but that was the that was the.
[14:16] Dean on e-commerce retail side of things and non ads with that behind us the other big win for the quarter I thought you’d want to kind of fill us in on was the advertising part what did you see there.
[14:30] Yeah yeah I want to jump into ads I do want to just say quickly it’s interesting on the AWS because they posted solid numbers they posted 12 percent growth for AWS and they announced that they won the whole dialogue was about all these AI workloads that you just covered but they haven’t recognized much of the revenue from all of these new AI workload wins yet so the this 12% growth feels like.
Kind of a win based on the Legacy Cloud business even before you start to factor in all this new traction they’re getting, I’m AI workload so so that does seem interesting but I just want to reiterate what you started out by saying which is, the the bed at Amazon is that you’re going to want to bring the llm to your data and not that you’re going to want to bring your data to the llm and that, intuitively.
[15:24] Makes a lot of sense so it seems like investors were always pretty happy with their the AI Cloud case that they made.
Um so that being said.
As far as I’m concerned an even bigger win for them was the ad business so so they generated 12 billion dollars in ad revenue for the quarter that’s up 26 percent versus Q3 of last year.
Year-to-date that means they’re had businesses up 23% from the year before so you know we’re comparing that to like the 11 or 12 percent growth they get on AWS.
[16:02] The ad business grew 21 percent last year so it’s grown 23 percent this year that impugns depending on how you factor in seasonality like a 46 to 50 billion dollar run rate for the ad business right now, so if you take a conservative estimate for the the the, margin rate on that business that’s generating 2728 billion dollars worth of ibadah for Amazon which is a huge.
Huge business and much more profitable than a WS by the way.
So the ad business was very robust and a couple of injured interesting takeaways.
Amazon is adding more and more video properties they have Thursday Night Football you know they announced that they’re going to start embedding ads and Amazon Prime and they’ll have a premium offering to bypass Those ads.
So there’s a lot of opportunity for.
Kind of top of the funnel linear programming ads at Amazon none of that is in this.
[17:09] 12 billion dollar number right now or very little like all of the potential they’ve they talked about for this for these non Commerce ads.
Is all sort of incremental the weather getting right now.
At the moment the vast majority of all Amazon’s ads are bottom of the funnel the the sponsored product listing is by far the most.
Popular ad that that’s growing particularly well and with the particular mix of economic headwinds we have at the moment, a lot of advertising is Shifting to bottom of the funnel people are less interested in investing in awareness and more interested in investing in sales and Amazon turns out to be, the best destination to take that that those dollars to put them into digital ads that generate.
Bottom of the funnel results so this quarter everyone was really interested to hear from the advertising companies, to see if advertisers were going to be cutting back right and so you know you mentioned meta had their their earnings call Google had their earnings call Facebook I’m sorry.
[18:17] Snap had their their earnings call and ads were uniformly up across everyone’s earning so metas ads were up 23%, Google’s ads were up 11% Google broke out YouTube ads which were up 12% snap ads were at 5%.
But nobody’s ads were up as much the 26% that Amazon’s were and nobody has had the consistently rapid add growth that Amazon’s had the last three quarters.
Um so the economic headwinds like do not appear to be.
Putting a huge crimp in the the digital advertising business and they appear to be disproportionately benefiting, Amazon and so then you go wait next quarter they’re going to be selling ads on all of their video programming and that could easily add another 5 billion dollars just for in to this this annual run rate so.
A lot of green lights in the Amazon ad business.
[19:21] The I’m not a huge Sports person but you mentioned Thursday night football and have you seen and kind of marrying this back today I think if you seem Prime Vision have you played with them.
[19:31] I have yeah.
[19:33] So for listeners what they do is on Thursday Night Football if you watch from actually I do it on my Apple TV and I’m in the Prime video app.
And then you can it takes you to the standard broadcast just like every other thing but you can go in and then you hit down arrow and you can select a different broadcast which is, Prime vision and what it does they’ve added feature since they did it they started it they’ve added all these new AI features that are really amazing so during a pass play they’ll show you the most likely Target they put like a Madden asked Circle in real time under the player and, he’ll flash like green or something if he’s a possible Target on the defense though they’ll show a potential Blitzer.
They’ll show you fourth-down probabilities in real time you know and it’s just amazing they’ve added tons of features of that since I’ve been watching it and I find it like really adds a ton to the game too.
Kind of see you can see the strategy in real time mostly broadcasters you know they’ll talk about it like Tony Rome or something but it’s way after the play after they’ve had time to put together animation this is doing it all in real time it’s just mind-blowing the amount of compute it must be thrown at that and you know I think it’s a it could change the way you think about sports and in a really interesting way.
[20:49] Oh yeah increasingly it’s a better experience watching the game at home then you can get in the stadium.
[20:54] Yeah the stadium doesn’t do that.
[20:56] They side note for soccer at the World Cup they actually did but you have to watch the whole game like through a are on your phone.
[21:05] Let’s see you at the stadium watching the game on your phone.
[21:09] Yeah I mean and it was cool right like saying same sort of thing like it’s overlaying all this real-time stats and probability was amazing.
Like it’s not a very good experience to like hold your phone up and have your camera on the whole time to sort of get all these stats and so.
Yeah yeah side no Thursday Night Football is the bane of my existence because I do play Fantasy Football and I never have my act together to have my lineups all set before Thursday night so, usually the game starts and I have to pray that I don’t have any super important players that I fail the start and then I can enjoy the game.
[21:46] Okay understood anything else on Dad’s.
[21:53] No I think that covers it pretty well on ads you know just.
We’ve we’ve talked about a lot on the show but the overwhelming success Amazon’s having with ads has this of course trickle-down effect that every other player and commerce paste is trying to figure out how to monetize their their traffic and get their share and at the moment nobody’s getting, anything like Amazon’s add, Commerce ratio and of course the audience eyes is start dropping off really quick after Amazon right you know you get a lot less eyeballs at Walmart then you have it on Amazon and a lot less eyeballs it Target then you have it Walmart and you know once you get smarter than that it starts getting real fragmented real fast.
[22:39] Yeah how do you were still there still even though that’s a big number they’re still like way far away from Facebook right so so number one is Google by a really big margin and number two is Facebook and then it’s Amazon and they’re like way ahead of everyone else but they have to even though they’re outpacing them, a little bit it would be like decades before they caught up in my own remembering that right.
[23:00] I’m not no I’m not going to say decades it’s an order of magnitude it’s like 102 million 100 to 200 billion dollar annual run rates for those other guys and.
[23:13] But they’re kind of getting to half right.
[23:15] Yeah yeah they are like they there with like within 50 percent of Striking Distance of number two.
[23:23] Yeah if you had said that to us five years ago we would not have believed it I would I would not have seen how I’ve been.
[23:30] Yeah I’ve been playing that what would you have thought five years ago game a lot and you you know you talked about who all the winners are in AI if you said five years ago the AI is going to become a huge thing what company is going to win like you we would have all been on Google.
[23:43] Yeah yeah or apple or it would not have been startup called open air that was nonprofit that flip to profit no one saw that coming including Elon Musk yeah.
[23:55] And by opening I you mean Nvidia but yeah.
[23:59] One tidbit I saw on ads I love the leak read the Wall Street reports and they largely talked about the same data but a lot of them are good at very good at modeling and they can when Amazon doesn’t tell them something like they don’t break out they break out the revenue for ads but they don’t break out the profit so it kind of gets swept up into this larger number but then they give you enough pieces you can kind of back into it so one of my favorite analyst he’s a friend of the show Scott Devitt he modeled back through there and to your point he basically said that the ad business has a 60%, EB de margin so net margin of 60 percent which is basically like just money raining at this like Google’s business model which I guess makes sense because Bass.
[24:46] Is it is good.
[24:48] Yeah because it is Google’s business model and this ties into you know you know more about this government stuff than I do but Google’s in a pretty nasty fight with the FTC, or the DJ I can’t remember some government Bureau important entity that that is claiming they have a monopoly on search and they’re basically pointing over here and saying look at these Amazon guys they’re closing in on us pretty quick and they always reference those stats that show you know like more than half the people start product searches and those online.
[25:19] Yeah no it’s super interesting I Scott Devin is way better at Financial models than me but I actually think he might be under estimating the profitability and part of it is.
There’s a lot of room for gray area like if you think about the the Amazon business it’s super fascinating you know the number one digital Advertiser in the United States of America is you know who buys more ads than anyone else.
18 billion dollars a year of ads they buy just from Google so they buy 18 billion dollars worth of eyeballs from Google they use those eyeballs to sell a bunch of stuff that they make money on and then they sell 50 billion dollars are the pants to those eyeballs.
[26:05] Ticket Arbitrage.
[26:06] It’s amazing eyeball Arbitrage and you know it’s.
So how much of that acquisition cost are you factoring into the profitability of the ad business versus the like I would argue that these are not separated bubble businesses as much as ever wants to talk about ads as a separate business to me it only exists because you have all this traffic for Commerce and it’s it’s a core part of the the Commerce math at this point but we shall.
[26:39] Yeah when we did our instacart coverage of this one now instacart been public for a while and you look at their numbers they’re basically only being the whole instacart business is being valued a zero except for that so they’re basically trading like an ad company so all of Wall Street said okay that grocery part is kind of like that yeah is there we’ll put it in like you know.
[27:02] A hundred million dollars and then the ad business is like worth date hundred million dollar ad businesses where they gave it a really nice multiple of like 5x so that’s interesting I’m sure, you’re going to spoiler alert you’re going to see a lot more ads on Insta guard the yeah a lot of people there is a negative and you know no one ever talks about this but a lot of people and this usually comes from a Amazon sellers and they always have kind of a love hate hate hate hate hate relationship with Amazon you know a lot of them would say and I hear this from consumers that the customer experience is the user experience is degraded on Amazon because there’s just so many darn ads now you know the and I see it too if I’m looking for a specific thing I’m kind of like a dad at okay that’s what I was looking for at some point there is cannibalization there and you know what we don’t know is what did they lose from yeah doing this like was their product they didn’t sell because people couldn’t find it or we’ll never really know that but you know kind of hope they’re smart enough to figure that calculus Alden make it a huge net positive versus the cannibalization getting close to the ebitda contribution.
[28:10] Oh yeah no I think two things like there definitely is an impact on customer experience and every retailer that gets into this space has a different philosophy about that and Amazon’s appears to be the monetization is just worth it but you know you think about everyone other retailers that are not waiting and quite so hard, are trying to balance that and then the new interesting thing is if you’re any retailer other than Amazon where all your eyeballs really are is not on your website it’s in your store right and but you go we’ll wait a minute, the these disruptions that people might tolerate as digital disruptions on a website they may not top you know nobody wants to junk a fi, um a physical store experience with a bunch of you know make it feel like you walked into Times Square every time you walk into, retail store so there’s all this interesting calculus on where everyone should land on that the other interesting thing to me is for a while there was a.
[29:13] An opportunity for the best practitioners to get outside return so there was a subset of all those Amazon sellers that were really good at the Amazon ad, execution right and they did their smart about where they put their bids they were smarter about the attributes they put in their ad there are smarter about the creative they made for their ad and they could get outside Returns versus other sellers on Amazon but the first Trends you mentioned the AI affectation of this whole business.
[29:43] Has sort of made the best practices, dummy proof right and so now you know you just hand a product shot to Amazon and it makes the ad for you and you turn over the bidding strategy to Amazon and it optimizes your bidding for you and so it’s squeezing more of the potential profit like out of all of these these other businesses that are built on top of Amazon because it’s, kind of.
Normalizing the the ad business to everyone and it just becomes a pure pay to pay like who’s going to be the most for this eyeball.
[30:21] Yeah kind of supports your theory that maybe the Madonna’s higher because they don’t have a lot of people sitting there at adding images or something like would they used to do back in the olden days.
[30:31] Is that you used to need this thing called what is it called Ad Agency.
[30:35] Yeah good cut the if you can just get one of those Bots I discussed or just like you have a some a I do it for him.
[30:40] Yeah yeah that was a funny example a few minutes ago.
[30:44] Unrelated news Jason is brushing up to c v so hit him up the so just to zoom out to the big picture so so we kind of dove into the to topical things A to B Us / Ai and adds, those together really causing Amazon to beat Revenue that they came in about one percent higher than Revenue so it was kind of like a slight beat / meat but where they really exceeded oh and revenue came in at 143 billion were they really crushed it was operating income and these two contributed to it but also retail did some interesting things that also yeah I think dramatically helped beat expectations operating income came in at eleven point two billion and expectations which is Wall Street consensus is what they say was seven point seven billion you know so that’s like what let’s like.
Five per billion beat you know like a huge be compared to whatever.
[31:51] Yeah so that push the stock up 10% and then also we’ll talk about guidance and that was positive so, it’s been interesting Amazon stock has been kind of in a you know.
Funk for lack of better words has been con rallying around at the same level and literally for quite a while like 18 months and this was the first Catalyst to cause a big move and that it’s market cap a 10% move at Amazon Lester look we’ll get one of our researchers here one of the interns I look okay.
So you know they were like 1.2 trillion and now they’re like 1.4 trillion so that’s you know a move like that takes a lot of dollars when you’re bigger than a trillion dollar business to move things it’s like a lot of.
A lot of value creation can happen in a 1.2 trillion dollar company when it shoots up ten percent in five trading days.
[32:44] 10% 0 by a lot of rocket fuel.
[32:46] It will yes a lot of dates with helicopter Pilots as well and a lot of cool new clothes, so there were some really interesting things you know we spend the bulk of our time here on the Pod talking about retail and e-commerce to our favorite topics so Jason there’s a lot of really interesting stuff going on in there as well you want to fill us in on that.
[33:08] Yeah everyone just wants to talk about ads and AI but it turns out that Amazon is actually a pretty good retailer.
And so the the retail business also had a good quarter and to kind of set the table, every every listener the show knows I love my US Department of Commerce data so that came out last week 4.
[33:31] September which gives us Q3 data for the industry so us retail data in September this was up one point year-to-date sales in the United States January through September we’re at one point nine percent this year versus last year.
It’s a 35 percent versus before the pandemic in 2019 so 1.9% is not very good growth by historical standards we would normally expect about 4% growth.
So if we just look at Q3 growth the industry was up 2% which again half of what you would typically expect.
So Amazon’s growth for Q3 is 11 percent versus that that industry number of 2% so 11% growth, is very robust the if you kind of, look at Amazon’s growth since the pandemic that Q3 number means they’re up 85 percent versus Q3 2019 and their year-to-date number is up 111 percent versus 2019.
[34:33] So Amazon is a very large retailer arguably number one or number two retailer in the US now, and they’re growing way faster than the industry average, and again depending on how you count Walmart would be the number two retailer which is also growing significantly faster than the industry average so that actually, tells you everything you need to know about the rest of the retail industry is that where you know we’re having a significant bifurcation and with winners and losers in the space.
[35:07] The other side of the retail business for Amazon is international and historically North America has been a very mature Market that has grown and generated profits, International has not made money for Amazon and I would say it was a mixed bag in terms of their International performance, on a constant currency basis International sales were up 11% which it’s a smaller less mature business so you’d like to see it growing faster than the, the mature North American Market, um but they’re operating loss is way smaller so last year this quarter they lost 2.5 billion dollars this year they only lost a hundred million dollars so nearly break it even for the quarter.
Um the this did not come up in their their earnings and no one asked them about this but Marketplace pulse reported earlier this month.
That appears Amazon has.
Meaningfully curtailed their International expansion and a lot of markets they had announced they were expanding into they seem to have delayed.
Postponed or canceled a lot of international market openings, so International definitely is not the start of the show it is also true of a lot of the other markets that say that Amazon’s in still have more.
[36:26] Just general macroeconomic headwinds than the United States does at the moment a lot of the world has a more severe version of the same macroeconomic problems that we have.
In the US so a couple interesting tidbits.
[36:44] But in the discussion about the retail business that you know the CFO Bryant.
[36:54] Scot I always pronounce his name wrong alsop ski, um brett-brett else got a soft ski talked about how despite the fact that their they had nice growth in retail that they are seeing a cautious consumer who’s generally trading down and more Deal seeking, then usual and that’s consistent with, cautions that we’ve heard from other retailers that actually gives me some significant pause for Holiday which we’ll talk about later, the the thing that that Amazon was really touting in the retail business is that they dramatically improve their cost to serve, and their speed of delivery in Q3 and that largely was thanks to an initiative they started a couple of quarters ago, this transition from a single National fulfillment Network.
To a regional fulfillment Network where they have eight distinct District regions in the United States, that each sort of operate independently in the goal is to have all the the inventory that that Scot Wingo wants to buy, in his region so the goods have to travel less far are less expensive to get to him, and get to him faster and what they announced in the earnings was that the transition to this this.
[38:19] Regional model has gone better and exceeded their expectations they’re getting more.
Incremental profit and faster speed of delivery than they even projected, um out of transitioning to that so this is.
[38:37] I know we talked a lot about how big and what a huge moat Amazon would just accept our but I still feel like this is under appreciated by most Amazon’s competitors and their there.
They’re just opening a bigger Gap in speed of service and one of the things they mentioned is that they see a direct correlation between consumable sales and speed of service when they promised that they can get them there faster they sell more paper towels, so I think it’s very clear that that consumers want speed of service, and Amazon has a huge advantage and it appears to be getting even bigger so that’s interesting another thing I talk about a lot.
[39:20] Um is there’s a few new retailers that are also stealing significant share, um very quickly and they’re primarily Chinese companies so it’s she in and most notably Tim oh, and so well like they certainly didn’t come up in the Amazon earnings a lot of the analysts started looking at the the, rapid growth that Tim is getting and trying to figure out if they’re stealing share from Amazon and evercore did a big consumer survey, and the results of their survey was that Tim ooh is mostly not stealing share from Amazon that most of its shares coming from, other retailers and in many cases coming from brick-and-mortar value retailers in the US so the dollar stores and it appears that that Amazon is more insulated from the.
The growth and profit that they’re getting so all of that you know rolls up to be a pretty impressive.
Quarter I you’ve talked about it a lot but it kind of feels like Amazon’s got a bunch of knobs that they can turn whenever they want to improve profitability and it feels like, they both added more knobs that can turn this quarter and they turn some of them.
[40:37] Yeah the other thing that’s really interesting is if you look at.
Amazon and you can’t really read because they have so many employees in the Fulfillment centers you can’t really tell their employee growth and it’s surging right now is they prefer prepare for holiday but another really interesting trend is Google meta and there’s one of the other ones Microsoft their revenue per employee is surging so they’re they’re actually not hiring many people right now and, the assumption is these companies are leveraging AI internally and becoming exceedingly efficient and you kind of wonder.
Is Amazon doing the same thing I hear inklings we have kids that are not so far out of college they don’t know folks looking for jobs and things I hear inklings that Amazon is not really hiring that much as they kind of were at one point so I kind of wonder, are they also hiding behind that that have like a million employees and it surges like 200,000 for holiday so it doesn’t look like they’re being more productive but what they don’t do is put out corporate versus fulfillment center.
Have to have an idea that if we looked at corporate there also.
[41:48] One dial they’ve turned its new is I think they’re not hiring as me folk because people are getting a lot of efficiencies from these AI.
Systems that these companies are dogfooding internally.
And because they’re they’re a little bit further ahead than kind of like what we see out of the lme’s I think they’re doing some really interesting things that they will productized and we will we will see what they’re doing in a lot of it can be this like really focused you know create an ad you know a lot of the stuff that used to be, kind of out sourced or you would have to throw a bunch of bodies at it I think there’s LMS doing a lot of that you know customer support Bots think things like that that you know I think there’s a lot of efficiencies going on inside of their that’s helping these guys really beat their earnings numbers.
[42:38] Yeah I do think that’s true it’s not lost on me that just as the retailgeek bought is gonna replace me at poobah says all the other places that might have hired me are also not so my fallback is that I may be washing cars at spiffy so we’ll see how that.
That all plays out but I promise to work hard of it if it comes to that Scott.
[42:58] Absolutely it also we could just turn this podcast into the entire ads so that could be could be here our second asked yeah.
[43:04] We can monetize the podcast I’m not I’m not doing that to the listeners they advertisers would make us make a shorter podcast Scott.
[43:13] Yeah yeah.
[43:14] I’m not down for that I’m not down for it.
Even if I have to wash cars the I think you’re certainly right like a lot of these companies and Amazon very overtly has has put some more barriers and in place in terms of corporate hires.
The one notable exception being the AI space they’re hiring pretty rapidly.
Um but I also think in addition anything you mentioned that Amazon’s actually finally like really leaning into the Fulfillment center automation so while they’ve always.
Been a leader in in having fulfillment center, not all their fulfillment centers in a big chunk of their fulfillment centers were not highly automated and so I think they’re now automating all of them and they’re rapidly moving to sort of next-gen automation.
Um you know where everyone else is kind of putting their first robots and you know moving things around the warehouse more efficiently.
Amazon is like rolling out new technology that’s a lot more.
Seamless in how the people and the automation work together in a in a safe cohesive way so I do think one of the levers Amazon has is.
You know to really add more Automation in those in those fulfillment centers and in that cost to serve.
[44:39] Absolutely it’s kind of interesting because we started spiffy, which is my on-demand car care company where you’re going to come wash cars people are like AI is you know they’ll be a robot that can do this in five years I was like I don’t know like you know the Boston Dynamics robots are cool but they’re not.
Let’s just programmed well I don’t think it’s like that you know it’s not thinking and who would have guessed that a I would replace you know the digital retail Talking Heads first and and not.
Not the physical things I think the physical stuff is going to take a lot longer but who knows once these a eyes you have there’s Tesla has that that demonstration of theirs was The Optimist that you know it kind of is learning things as it goes and making inference in real time so that is kind of you know we who knows where all this is going to go.
If we back to it now and not science fiction but your term science fiction so.
[45:37] Looking forward for fourth quarter they put guidance out that they’re going to see growth in the fourth quarter of 7 to 12% the midpoint of that range which let’s see would be 9 and change itself was five and a half percent above the consensus midpoint so this is what we would call A Classic.
Meet Top Line Crush bottom line on the current quarter and then raised the next quarter both top and bottom line pretty substantially so that you know.
This is an important data point when we kind of swirl it together with your Department of Commerce data it does seem like Amazon signaling they’re feeling pretty good about the fourth quarter and everyone felt like this was kind of conservative given I didn’t put the bottom line number but they felt like that was pretty conservative given what they just did and you know they felt like dad a lot of room to kind of beat that number and maybe it’s going to be more like 14 15 percent growth which would be you have a new post covid reversion hi I guess you would look at it where do you did you leave this feeling more optimistic about Q4 or we are your classic Jason curmudgeon myself.
[46:54] Yeah no I think I’m mostly curmudgeon e not for Amazon I actually I think their guidance seems realistic to me.
[47:06] On the top line I think the bottom line is just totally up to their whims like if they want to blow away the bottom line they can if they want to invest at all in you know new.
[47:18] New AI capabilities and and keep the bottom line constrain they can do that too but the that, Top Line I think they’re likely to hit their guidance and again you know one or two other big retailers might you know have a pretty robust holiday as well but I actually think that that sucks all the, the potential growth out of the market for holiday and so I actually think.
That sort of signifies potentially Bleak holiday season for a lot of other traditional retailers so I guess it’s a.
Little bifurcated it’s good news for Amazon will see what a Walmart’s Q3 earnings look like they announced on November 16th, but I do feel like endemic lie Amazon and Walmart have some, some inherent advantages that are insulating them from some of the economic headwinds and I think that that really just makes things, that much more difficult for the the rest of retail and so I desperately want to be wrong but I think it’s going to be, I kind of disappointing holiday for a bunch of folks there also was sort of some if you really listen to the Q&A portion of the investor call, there.
[48:45] The the CFO in particular had some concerns about capacity around Q4 and one of the things he called that was carrier capacity which is interesting because Amazon does so much.
Of their own fulfillment now that they’re just way less dependent on third-party carriers but if he’s worried about carrier capacity for Q4 you can bet that means that every other retailer ought to be really concerned, about carrier capacity for cube Q4, and so we you know we feel like we talked about that every holiday season but Amazon’s got a lot of.
New fulfillment center capacity that’s coming online in Q3 of this year and will even in Q4 and so I guess.
If there’s one thing that could glitch it Amazon if there’s not enough delivery capacity if some of these new fulfillment centers have any, any sort of glitches or delays and coming online that you know that that could be the constraining factor for their Q4 growth.
[49:50] There’s so sprinkle of curmudgeon e speaking of holiday where can listeners go if they want to get the best holiday news even though we haven’t been potting as much as we want to because our day jobs have been absorbing a fair amount of time this year we are going to have some killer content around this holiday and kicking it off we have our very own jacent live not an AI and you’re going to do a little webinar for Commerce next what’s that all about and when is it.
[50:22] Yeah yeah so on Monday November 6 which I think is a week from now if I’m not mistaken we’re doing a Commerce next webinar where we’ll sort of preview the holiday season so you heard the very early preview just now but we’ll go into more detail share some of the third-party forecast for Holiday Good News, all the other predictors are much more optimistic than I am so so we’ll hit that on November 6 and then of course there will be all the good real time holiday news that will be will be hitting pretty hot and heavy here on the podcast so we’ll we’ll have some of the best data sources, right before and after the holiday to kind of talk about where things are going and what actually.
[51:15] And with that I think it is happen again we’ve used up all our allotted time as always if this deep dive in Amazon’s earnings was valuable for you the way you can repay that value is to jump on iTunes and give us that five-star review.
[51:31] Thanks everyone and Jason until next time.
[51:34] Happy conversing.