Amazon.com needs to further reduce its headcount to improve its eCommerce margin, according to analysts at Oppenheimer. “We believe AMZN's 25% underperformance versus Nasdaq LTM is being driven by share loss to Microsoft (MSFT) and lack of eCommerce profitability. Following our deep dive into AMZN expenses, we believe more layoffs are necessary for eCommerce to become meaningfully profitable.”
The analysts noted that Amazon’s profitability per employee ex-warehouse workers was significantly behind its large-cap peers. “Earnings before interest and taxes per corporate employee was about $60,000 pre-pandemic, jumped to about $75,000 during the pandemic, before falling to about $30,000 last year,” they wrote. “Since 2019, AMZN has increased operational expenditure per non-warehouse employee ex-D&A/Fulfillment by 53% versus META's plus 14% and MSFT/GOOG 3%/2% declines.”
As such, the analysts reduced their price target for Amazon to $125 from $135, with their new price target assuming 10x FY24E AWS revenue/1.5x FY24E eCommerce GP.
AMZN's profitability per employee, excluding warehouse workers, is significantly behind large-cap peers. EBIT per corporate employee was ~$60K pre-pandemic, and then jumped to ~$75K during the pandemic before falling to ~$30K last year. Given significant ramp vs peers, Oppenheimer believes further layoffs are likely required to return to profitability.
The analysts continued in the note, "Our checks confirm client cost optimization is not done. However, we think lower headcount, SBC, and energy costs are enough to offset our previously Street-low AWS EBIT estimates. As a result, our FY23/FY24 EBIT margins are now ~190bps above the Street at 26%/28%."
Oppenheimer reduced FY23 and FY24 revenue by 1% while increasing EBIT 17% and 12% respectively on AWS changes. Oppenheimer's FY24 estimated AWS revenue is 9% below consensus. The company’s headcount can be further right-sized under its new CEO Andy Jassy.