ii view: Covid costs could plunge Amazon into red

by Keith Bowman from interactive investor |

CEO Jeff Bezos tells shareholders to sit down. Covid-19 investments will be massive.

First-quarter results to 31 March 2020

  • Net sales up by 26% to $75.5 billion
  • Operating income down 9% to $4 billion
  • Diluted Earnings Per Share (EPS) down 29% to $5.01

Chief executive Jeff Bezos said: 

"From online shopping to AWS (Web Services) to Prime Video and Fire TV, the current crisis is demonstrating the adaptability and durability of Amazon’s business as never before, but it’s also the hardest time we’ve ever faced.

"If you’re a share owner in Amazon, you may want to take a seat, because we’re not thinking small. Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on Covid-related expenses getting products to customers and keeping employees safe."

ii round-up:

Online retailing giant Amazon (NASDAQ:AMZN) forecast a possible loss for the second quarter as it looks to invest heavily in Covid-19 measures, such as Personal Protective Equipment (PPE) and higher wages for certain staff.

Its shares fell by around 5% in after-hours US trading, although are up more than 30% for the year-to -date.

Despite generating a second-quarter profit of around $4 billion in normal times, Covid-19 investments are expected to generate an outcome of anywhere between a loss of $1.5 billion to a profit of $1.5 billion. This compares to a profit of $3.1 billion in the second quarter of 2019. Sales should grow between 18% and 28% year-over-year to a total of $75 billion to $81 billion. 

Coronavirus has infected workers across a number of Amazon sites. Investments are likely to include virus testing kits. 

This time, sales of $75.5 billion for the first quarter itself beat Wall Street estimates, although earnings fell short. 

Its cloud data centres business, Amazon Web Services (AWS), which competes against both Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL), reported revenues that exceeded $10 billion for the first time. During the corona crisis, companies and organisations have become ever more reliant on cloud data facilities. 

The NHS is using AWS to help analyse hospital occupancy levels, emergency room capacity and patient wait times in order to best allocate resources. 

ii view:

Amazon offers investors the chance to buy into a retail revolution. Often blamed for the demise of physical shopping outlets, the convenience that Amazon has brought to the shopping arena is reflected in its phenomenal growth. The group’s AWS business also offers attractive growth potential. Microsoft’s previous US government defence win was worth around $10 billion over 10 years. 

Now, Covid-19 has brought both opportunity and challenges. Population lockdowns and the closure of many of its high street rivals has provided a huge opportunity, although protecting its own staff has clearly created challenges. 

For investors, a stock market value which consistently exceeds $1 trillion might suggest that the best of its growth is now behind it. But a forward price/earnings (PE) ratio of over 85 implies that investors and analysts anticipate much more to come. As with the other mighty US tech stocks, the debate about valuation is never far away. But Amazon is the retail market leader and streets ahead of the rest - and why investors keep buying. 

Positives

  • Dominant position in online retailing
  • The Amazon Web Services (AWS) business is now a major global player

Negatives

  • The threat of increased regulation across many of its markets
  • Management succession risk – who might replace current CEO and founder Jeff Bezos?

The average rating of stock market analysts:

Strong buy

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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