By Sam Boughedda
Following reports that Amazon (NASDAQ:AMZN) is undertaking a cost-cutting review and paring back investment on businesses that haven't been profitable, Morgan Stanley analysts stated that "every 10% reduction could drive ~$1bn/5% to '23 EBIT."
The analysts, who have an Overweight rating and $140 price target on Amazon, noted that the Alexa business, in particular, was called out in the article as being closely evaluated due to operating losses exceeding $5bn annually.
"While the timing and amount of the potential cost savings is still unknown, there are investments to reduce/cut to become more efficient," wrote the analysts.
Morgan Stanley estimates that Amazon spends as much as $10 billion to $15 billion on "Other Bets" annually, with investments including Alexa, Kuiper, Zoox, Video Games, and Healthcare. "Many of which we think generate limited revenue relative to AMZN's level of spend," added the analysts.
"We don't expect AMZN to cut all of its "Other Bets" spend (as some investments lay the foundation for next legs of growth) but increased rationality would symbolize an important shift toward increased focus on driving efficiencies and company-wide profitability," they commented. "Cutting costs in these areas could represent significant incremental upside EBIT, with every ~10% reduction in annualized "Other Bets" spend adding ~$1bn to EBIT (or ~5% to our '23 EBIT, for context)."