Wall Street analysts are applauding the cost-cutting moves by two technology giants in the last two days amid a major slowdown in revenue, but investors appear to be more worried about Amazon, where its highly profitable and big-growth cloud business has helped cushion it in the past.
Late Wednesday, Amazon.com Inc.
confirmed a Wall Street Journal report that it plans to cut 18,000 jobs. That was far more than the initial reports and estimates that the company would cut about 10,000 jobs, thousands of which began late last year. Amazon shares fell as much as 2.37% on the news.
So far the Amazon cuts are the biggest among tech companies, which are seeing a sharp drop in the double-digit percentage growth rates many large companies saw during the pandemic. The company has only said that the majority of job cuts are in its Amazon Stores and its PXT organizations, which it calls its people experience and technology solutions teams. It has not said whether any cuts are coming from its cloud services business, Amazon Web Services (AWS).
On Wednesday, Salesforce.com Inc.
one of the big providers of cloud-based software and a pioneer in cloud software, said it would cut 10% of its workforce. Investors sent Salesforce shares higher on that news yesterday.
Both companies went on big hiring sprees as their revenue surged, to help keep up with a surge in demand, which has slowed along with the macroeconomy. For Salesforce, it is its first big pothole after over a decade of double-digit growth that ranged from 22% to 37%. Now, in fiscal 2023 and fiscal 2024, analysts expect revenue at Salesforce to slow to 16.92% and 10.48%, respectively, as corporate demand slows, and the companies trim sales and marketing teams.
Amazon saw serious monster growth in the pandemic, when many consumers used ecommerce to buy things instead of going out into stores, and the company beefed up its hiring to match. Its employee headcount surged to over 1 million during 2020, its most profitable year and a year when revenue surged 37.62% to $386.1 billion. But its AWS cloud business has always been its biggest profit generator, with higher operating income than Amazon’s other ecommerce, media and retail businesses.
Earlier this week, UBS analyst Lloyd Walmsley cut his estimates on Amazon, noting that he believes consensus estimates on Wall Street for AWS are “meaningfully too high.” He is now looking for AWS to grow at rates of about 21% in the fourth quarter, and then slowing to 18.4% annually for 2023 and 19.3% in 2024. This is down from growth rates ranging from 33% to 39% in the last four quarters.
Walmsley cited a broader report by the UBS software team, and “deteriorating cloud checks around (1) customer efforts to optimize/trim cloud spend, (2) delays in new workload migration to avoid upfront costs, and (3) beyond the cyclical/
macro, a shift into a more mature “phase two” of market development.”
This jives with what MarketWatch has been reporting about a coming cloud business slowdown, and comments by executives on recent earnings calls. In October of 2022, Amazon’s Chief Financial Officer Brian Olsavsky talked about seeing a slower growth rate at the back end of the third quarter AWS.
Now the big question is whether Amazon’s overall revenue estimates will come down further in the next few weeks either before or after the company reports earnings later this month. Currently, the Wall Street consensus, according to Factset, is for Amazon to see its overall revenue growth rate bottom at 8.6% in 2022 to total revenue of $510.3 billion, and growth of 10.13% to revenue in 2023 of $562 billion. Some investors are not sticking around to find out.