Amazon Pauses Virginia HQ2 Construction amid Tech Slowdown
Amazon (NYSE: AMZN) has paused the construction of its HQ2 in Virginia. The company selected Virginia as the site for its next headquarters after a nationwide competition in 2017.
John Schoettler, Amazon’s real estate head said that the first phase of the project is on track and would open in June. The first phase is known as Metropolitan Park and would house around 8,000 employees.
However, he said that Amazon has decided the pause the construction of the second phase of its HQ2.
In his statement, Schoettler said, “We’re always evaluating space plans to make sure they fit our business needs and to create a great experience for employees, and since Met Park will have space to accommodate more than 14,000 employees, we’ve decided to shift the groundbreaking of PenPlace (the second phase of HQ2) out a bit.”
He added, “Our second headquarters has always been a multi-year project, and we remain committed to Arlington, Virginia, and the greater Capital Region.”
Previously, Amazon said that it would create around 25,000 jobs in Virginia. However, the macro environment has deteriorated over the last six months.
Amazon Sales Growth has Fallen to All-Time Lows
Take for instance, in 2022, Amazon’s revenues rose by only 9% which is the lowest on record. Also, AWS revenue growth slumped to 20% in Q4 2022 which is the slowest since Amazon started to report the segment’s earnings separately.
Also, Amazon’s North America and International e-commerce operations are posting losses. In 2022, the North American e-commerce business reported an operating loss of $2.8 billion. The international e-commerce business lost $7.7 billion.
However, AWS reported an operating profit of $22.8 billion in the year. AWS is the market leader and some analysts including Nick Jones of JMP Securities believe that AWS alone is worth more than the entire company. Despite the recent dismal financial performance, most Wall Street analysts recommend buying Amazon stock.
For the last two years, Amazon has been posting negative free cash flows. If anything, the cash burn increased from $9.1 billion in 2021 to $11.6 billion in 2022.
Amazon has admitted that it built excess capacity. Like fellow tech companies that benefited from the changed consumer behavior during the pandemic, AMZN is now witnessing a severe growth slowdown.
It has scaled back on investments and is looking at various measures to cut costs.
Amazon Announced Mass Layoffs
Many tech companies including Microsoft, Alphabet, and Netflix have laid off employees amid the slowdown.
Meta Platforms, which laid off 13% of its workforce last year, is reportedly planning another round of layoffs in a bid to cut down on expenses.
Meanwhile, markets have largely been supportive of tech companies’ cost-cut efforts. Tech companies overhired during the pandemic and now find themselves overstaffed amid slowing growth.
In January, Amazon announced 18,000 layoffs which was higher than what it was previously planning.
Also, last month, the company ditched its work-from-home policies and said that beginning in May, employees would need to work from the office for at least three days a week.
In his blog Amazon CEO Andy, Jassy highlighted several reasons behind the change in its work-from-home policy. He said that the company’s S-team studied various models and finally concluded that employees should work from the office majority of the time.
Tech Slowdown Has Deepened
Tech slowdown has deepened and companies are taking several measures to control costs. Sales growth of tech companies including Alphabet, and Meta Platforms has nosedived and the latter reported its first annual fall in revenues in 2022.
While Amazon hasn’t explicitly stated, the pause on its HQ2 construction should be seen in the light of the deepening tech slowdown. Managements are under pressure to control costs amid sagging stock prices.
At least two tech giants, namely Alphabet and Meta Platforms faced stockholders’ ire over spiraling costs. While Altimeter Capital called upon Meta to cut costs, TCI Fund Management wrote a letter to Alphabet’s management. Both Alphabet and Meta announced mass layoffs weeks after the letters.
Meta Platforms is meanwhile the best-performing FAANG stock of 2023 and has gained over 50% YTD. Last week, Meta lowered the price of its Quest Pro VR headset by $500 to $999.
Some Meta Platform investors have been wary of the company’s metaverse investments which have been a drain on its profits. However, many analysts believe that the metaverse is crucial for the company’s long-term success. There is a list of companies that are a play on metaverse.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.