Amazon (AMZN) – Shareholder Letter, India & Piper Sandler – April 13, 2024
CEO Andy Jassy Shareholder Letter:
Amazon CEO Andy Jassy published his latest shareholder letter this past week. It dove into how Amazon thinks and how it has configured its business to drive historic success. It was a lengthy, yet valuable piece for understanding why you own what you own. Here are the highlights:
On Primitive Services:
The main theme of this letter revisits a 20-year-old Amazon idea about “Primitive Services.” In the firm’s mind, these are “discrete foundational building blocks woven together in whatever combination desired.” It famously introduced this idea in 2003 in its AWS vision letter. These services fixate on unbundling use cases to perfect them one at a time. The roadmap of development is guided solely by customer pain-points, and each service is beautifully tied together via slick application programming interfaces (APIs) to ensure the pieces are cohesively, not disparately, conjoined. This allows Amazon to emulate service customization without needing to build from scratch each time a merchant wants something slightly different. It creates a la carte style client purchasing. Why is this important? Because merchants are all unique, as are their needs. Think of primitive services like atoms. They’re indivisible, but can be combined in nearly-endless ways into different molecules to create a plethora of end products.
Jassy took us through how Amazon created this approach and how it’s implemented. Looking backwards, Amazon’s fulfillment network was the example used. The firm first built a primitive service to perfectly handle and distribute inventory for Amazon only. It then leveraged this service and opened it up to 3rd party merchants. This created operating leverage on existing capital infrastructure while giving its marketplace a broader array of inventory. He spoke about how Amazon applied the exact same idea to its payments, search, and other microservices like last-mile delivery. These needed to exist separately from one another, rather than being inherently stapled together, which Amazon learned the hard way through early failure. At the very beginning, it let Target.com use its tech to power their storefront and “jumbled” services together with some customization built-in. Instead, that design required partitioning of products into primitive services, which eventually laid the groundwork for AWS.
This idea seems to stand in stark contrast to the “vendor consolidation” and “platformization” software themes of 2023 where combining products is preferred… but it doesn’t. Amazon is still offering an overarching platform, just a malleable platform that looks different for different clients. This ensures that every single ingredient in the overall platform is best-in-class and used only when needed. Primitive services can be enjoyed by Amazon, leveraged by clients in isolation (like with Amazon Shipping for last-mile delivery for example), or weaved together to create something commonly needed by client needs like Buy with Prime (BwP) or Fulfillment by Amazon (FBA). Per Jassy, building with this mindset amplifies “freedom” of creation and fosters many more ways to drive profitable growth. Jassy discussed how Amazon failed early on in healthcare and robotics. It didn’t begin to succeed until it began to embrace this exact same philosophy of building one hyper-localized service at a time to solve one, specific pain-point.
The Next Primitive Service Focus Areas:
Generative AI (GenAI) is the next pillar of primitive services for Amazon. I’ve previously shared the three layers of GenAI. Layer one encompasses foundational models (FMs) and involves the chip and hardware infrastructure that goes into creating them. Jassy talked about how Nvidia’s graphics processing units (GPUs) have been used to create most FMs to date. However, advancements in Amazon’s Trainium (for model training) and Inferentia (for model inference/prediction) chipsets are powering new models of best-in-breed players like Anthropic and Hugging Face. He mentioned significant performance, cost and memory bandwidth upgrades for the new versions of these chips, as well as its Graviton central processing units (CPUs) for general compute. Amazon’s SageMaker is its managed means of guiding developers through the model creation journey in a more intuitive manner. It’s sort of like an instruction template. SageMaker is helping Perplexity AI train models 40% faster and Workday reduce inference latency by 80%.
Layer two is where companies leverage FMs to create niche, localized, and customized models. Amazon Bedrock is its big product here, which already has tens of thousands of customers and a broad set of available foundational models to utilize.
Layer three is the consumer application layer, where its shopping assistant (Rufus), automated AWS coding (Amazon Q) and Alexa upgrades will come into play. The first spending wave has been within layer one as hyper scalers and consumer internet giants race to put infrastructure in place so they can enjoy monetization in the other two layers down the road.
On E-Commerce & Logistics:
Jassy essentially took a victory lap here on how rapidly Amazon has been able to optimize its supply chain via regionalization and same-day facility expansion. He reviewed how these factors have cut Amazon’s per unit costs, with improved delivery speed and customer service, for the first time in six years. The new layout and its last-mile delivery investments are also freeing Amazon to be a bigger player in perishable goods as well as everyday essentials. This category grew by 20% Y/Y in Q4 2023, which was a new disclosure and is encouraging. He also told investors that more reductions in per unit fulfillment costs were coming in 2024. Focus areas will evolve from localization and better supply chain monetization to inbound fulfillment optimization and inventory placement. Its newer same-day facilities and inventory algorithms are placing inventory closer to the final predicted destination more often. That drives down cost.
In other e-commerce news, Mexico became its latest country to turn profitable. It generally takes Amazon about a decade to deliver this inflection in new markets, and it remains confident that every single newer market is on that trajectory.
“There has never been a time in Amazon’s history where we’ve felt there is so much opportunity to make our customers’ lives better and easier. We’re incredibly excited about what’s possible, focused on inventing the future, and look forward to working together to make it so.” – CEO Andy Jassy
I was already a big fan of Jassy’s. The more I hear him talk and read his thoughts, the more I like him.
Amazon CEO Andy Jassy
India
A few years ago, Amazon lost a bidding war to Walmart in its quest to buy a majority stake in Flipkart – the Indian e-commerce giant. Following that development, Amazon pushed aggressively into the market and claimed the top site traffic spot as of January 2024. Still, Flipkart leads in overall e-commerce market share… but Amazon has its ambitions set on a larger piece of the pie. This week, it announced “Bazaar” as a new, low-priced e-commerce site in that market. It will sell fashion and home goods for prices ranging from $2.39 to $7.21.
India is an incredibly compelling international growth market. Its population is young, giant and growing while its middle class continues to expand too. Its government is both business and US friendly; its economy is poised for 6.5% growth this year as it races to become the 3rd largest in the world. This news makes a ton of sense as Amazon gears up to invest $26 billion in India over the next 6 years.
Piper Sandler Data
Amazon remains the most widely used e-commerce site among teens. 61% of respondents surveyed by Piper Sandler use it vs. 57% Y/Y. This just keeps ticking higher & higher for every new survey released.
