Amazon Is Nearly Doubling Its Layoffs. Here’s What It Means for Investors.

Amazon (AMZN -1.50%) Tighten your belt again.

After announcing plans to lay off 10,000 corporate employees in November, the company is now cutting salaries for white-collar workers by another 8,000.

In its initial announcement in November, the company said it would make more job cuts, but investors initially welcomed the news as the stock rose nearly 2% in after-hours trading on Wednesday. On Thursday, shares fell in line with broad market selling.

After a 50% decline in stock prices last year, it’s clear that investors and companies are looking for catalysts to help their business and stock price recover, and workforce optimization is one of them.

Image source: Amazon.

dirty details

Amazon’s first round of layoffs was largely aimed at its books and devices division following reports that Alexa was losing $10 billion a year. The latest round focuses primarily on the company’s e-commerce segment and talent.

In a letter to Amazon employees, CEO Andy Jassy said the uncertain economy and the company’s decision to hire aggressively during the pandemic boom have led to plans for the year ahead. He said the process was more difficult than usual.

Jassy had no plans to announce layoffs yet, but the news was the first to leak. wall street journal So Amazon published it. The company is still putting together severance packages and related information and will notify affected employees beginning January 18.

Amazon struggled throughout 2022. Overexpanding production capacity during the pandemic led to higher losses in the e-commerce sector, which saw sales grow only 8% from his 2% in the fourth quarter, which nearly halted growth. bottom. In addition to previous layoffs, Amazon has taken a number of cost-cutting measures, including closing once-promising businesses such as in-person and online health clinics Amazon Care and delivery robot Scout. I’m here. The company has also canceled or closed dozens of warehouses, took steps to right its logistics footprint, and announced a hiring freeze.

What it means for investors

Together, the 18,000 employee layoffs represent approximately 6% of Amazon’s corporate workforce. This is a significant cost-saving initiative aimed at our highest-paid employees.

Amazon didn’t detail the savings, but a conservative estimate of $100,000 per employee equates to $1.8 billion in annual cost savings. This does not include potential associated costs such as real estate.

Layoffs are the worst way for companies to cut costs as real people are losing their jobs, but cutting costs at Amazon is premature, and cutting staff after last year’s stock market crash is unlikely. Makes sense.

Amazon doesn’t separate its workforce from frontline workers in its report, but total employment will grow from 798,000 in Q4 2019, before the pandemic began, to 1.54 million by Q3 2022. almost doubled.

Also, the market seems to have changed its view of Amazon in the last year. For a long time, investors were willing to cast doubt on the company’s steady sales growth despite marginal profits overall. But with growth slowing and the company now hitting $500 billion in annual revenue, delivering meaningful returns is more important than ever.

While revenue growth has slowed, losses outside Amazon Web Services (AWS), the company’s cloud infrastructure division, have widened. The company’s non-AWS business lost more than $8 billion by his first three quarters of 2022. Report Alexa’s $10 billion loss also raises the question of what other lines of business are bloated.

Prime Video, with a budget of around $15 billion in 2022, looks like one target, but the international e-commerce segment, which has been losing money most of the year, also seems worthy of a chopping block.

Investors were instinctively right to price the stock high on news of layoffs. Amazon is far more profitable than it actually is, as high-margin businesses like AWS and advertising alone will likely justify its current market cap below his $900 billion. can be higher. The stock is arguably a bargain, but Amazon needs to do more to reassure investors and convince them that they can steer their bottom line in the right direction.

Investors hope to get more details from Jassy about how the layoffs will affect Amazon’s bottom line. After extensive cost-cutting efforts, earnings are expected to pick up in 2023, which is good news for the stock.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has a position at The Motley Fool has a position on and recommends The Motley Fool’s U.S. headquarters has a disclosure policy.

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