Unsurprisingly, e-commerce sales have been slowing since Amazon (AMZN -14.05%). They surged at the start of the pandemic, as hundreds of millions of people sought to avoid shopping in person. But this high level was not sustainable. Eventually, people would revert to a more typical mix of online and in-person spending.
That time has come, so Amazon’s e-commerce sales have taken a hit over the past quarter. Online sales fell 3% in the first quarter of 2022. Amazon posted $51.1 billion in revenue in the category, compared to $52.9 billion in the same quarter last year.
The slowdown was to be expected. Consider that during the same period in 2021, there were many more trade restrictions around the world. As economies continue to reopen over the next four to six quarters, investors can reasonably assume that Amazon’s online sales will be challenged.
Nevertheless, the news seems to have caught investors off guard and the stock fell in response. Fortunately, Amazon’s other two segments – Amazon Web Services and Advertising – are still profitable and thriving. Let’s dive into it.
Amazon Web Services saves the day
Amazon Web Services grew sales 37% year-over-year in the first quarter. The segment accounted for 16% of Amazon’s overall sales and all operating profit. AWS generated $18.4 billion in sales and $6.5 billion in operating revenue; excluding AWS, the rest of the activity would have generated an operating loss. Investors may be encouraged that the most crucial segment of the business is revenue growth at such a steady pace.
In recent years, Amazon has also increased its advertising business, which makes sense. After all, hundreds of millions of shoppers visit Amazon’s website, and marketers would love the opportunity to influence their buying decisions. Plus, many of these customers have a payment method saved and are one click away from buying. Amazon arguably offers advertisers the ability to influence consumers closest to a purchase.
In the first quarter of 2022, Amazon’s ad revenue grew 23% to $7.9 billion. In the past four quarters combined, Amazon has generated more than $32 billion in ad revenue. Admittedly, the segment’s growth rate has been decelerating since its peak of 88% in the second quarter of 2021. Yet, it has increased by more than 20% in six consecutive quarters. Marketers spent $763 billion globally in 2021, so Amazon’s growth in the industry is another encouraging trend for shareholders.
Amazon stock tumbles after first-quarter results
However, the market was focused on Amazon’s slowing e-commerce sales and rising costs the day after its earnings announcement. The stock was hammered and was down more than 14% by midday. Investors are right to be worried; without AWS, the company would have lost more than $2 billion in operating revenue in the first quarter.
Worse still, management expects its problems to continue into the second quarter. Sales are again expected to grow by less than 10% and operating profit is expected to fall by several billion dollars compared to the second quarter of last year. Stay tuned and watch how Amazon handles changing consumer behavior as the pandemic evolves.