On Wednesday, June 8, analysts at Bernstein Research sent a public letter to Amazon’s CEO and board of directors, arguing that Amazon is pursuing “too many ideas” and needs to focus on the best opportunities.
In an open letter to Amazon CEO Andy Jassy and the board, Bernstein analyst Mark Shmulik said Amazon has become too fragmented and missed opportunities in its core business as it seeks to disrupt everything from health care to grocery stores to Internet satellite services.
With AWS, Amazon still dominates the e-commerce and cloud computing space. However, analysts say the company has invested heavily in many other areas as well, but has not seen results.
Schmulik, who has an Outperform rating on Amazon stock, wrote in an open letter, “We fully support Amazon’s efforts to identify and seize the next AWS opportunity of scale. But what we’ve seen recently is that the company is pursuing too many ideas, and the not-so-good ones are taking away resources, capital and, most importantly, attention from truly disruptive innovations that ‘only Amazon can do.”
Amazon’s stock performance has also disappointed investors compared to its “closest tech giants (Apple, Microsoft and Google),” Schmulik said. So far this year, Amazon shares have risen a cumulative 50 percent, but over the past five years, the stock has underperformed the other tech giants by about 52 percent.
Schmulik urged Amazon to return to a “day one startup” mentality, referring to a phrase championed by Amazon founder and executive chairman Jeff Bezos. Bezos has said that a Day One mentality will help Amazon avoid demise and encourage it to continue to innovate as fast as a startup, no matter how big the company becomes.
In his 2017 annual shareholder letter, Bezos said, “The startup day two mentality is to stagnate and then become irrelevant. This is followed closely by a painful decline and finally death. That’s why it’s always important to maintain a day one startup mentality.”
Schmulik writes that Amazon should divest itself of health care and its newly formed low-earth orbit satellite program, Project Kuiper, or seek outside financing or cut spending. He noted that Amazon has been in the healthcare space for years, before dropping its remote healthcare service Care, its health and fitness bracelet Halo and its healthcare joint venture called Haven.
According to Schmulik, “Project Koyber seems more extreme as an investment area,” with Amazon committing $10 billion to expand the program. Google’s lack of success with Project Loon, Fibre and Fi, he wrote, suggests that “capital-intensive, low-margin utilities are not worth the effort, no matter how ‘cool’ the technology.”
Schmulik said Amazon should even follow Google parent Alphabet’s lead and integrate Project Kuiper, healthcare and possibly Alexa, the smart voice assistant, into its “other bets. Doing so would demonstrate a “healthier, more profitable core business” and would not detract from the company’s efforts to “build the next AWS.
Schmulik is also skeptical of Amazon’s expansion in still-competitive international markets such as Brazil, Singapore and India. He called it “a waste of money,” although these markets may have strategic value.
Schmulik writes that Amazon needs to “investigate ahead of time” when considering the launch of brick-and-mortar businesses such as Whole Foods, fresh produce supermarket Fresh and cashierless convenience store Go. The company acquired Whole Foods for $13.7 billion in 2017 and continues to roll out groceries on its website, along with other pilot stores. Recently, the company suspended further expansion of its Fresh and Go stores as Jassy looks to cut costs.
In Schmulik’s view, instead of continuing to “tinker” with its Fresh and Go stores, Amazon should “buy a proven concept, such as a potential divested KR/ACI store,” he said, referring to Kroger and Albertson’s are selling as part of their integration plan.
Schmulik said Amazon should focus on its core strengths and continue to push into other areas that have gained traction, encouraging continued expansion of its advertising and media divisions, as well as continuing to expand its Buy with Prime service, which allows sites outside of Amazon to take advantage of its Prime delivery.
Schmulik added that the current strategy of aimlessly spreading the net around is confusing to shareholders and needs to be corrected to curb continued underperformance. He noted that it remains uncertain where Amazon stands in the AI race.
“The questions we’re getting from investors today are, ‘Is AWS at the bottom of the AI pack?’ , ‘Is retail really a profitable business?’ , and even ‘Do we want Jassy on the earnings call?'” Schmulik writes. “All of this points to a fundamental problem: Amazon has no narrative of its own.”
An Amazon spokeswoman did not comment for this article, but pointed to a shareholder letter Jassy wrote in April that addressed some of the issues covered in the Bernstein report. In the letter, Jassy said Amazon spent months analyzing the business and determining “whether we believe each of our plans has long-term potential” to boost revenue and operating profit.
Speaking of international expansion, Jassy said, “These new markets will require a certain amount of fixed investment to launch and scale, but we like their current trajectory.”
In the letter, Jassy said Amazon needs a “broader physical footprint” to serve more people in the grocery market. This is “a very large potential opportunity for Amazon” for Project Koibe and is initially capital intensive, similar to AWS.