Amazon will spend $4 billion or more on coronavirus response, potentially wiping out Q2 profit

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Amazon.com Inc. topped $75 billion in sales in the first quarter as COVID-19 swept across the globe, but profit declined and the company said Thursday that it might lose money in the current period as it spends to keep up with demand.

Shares of the company dipped 5% in after-hours trading Thursday.

Amazon AMZN, -5.96% reported first-quarter earnings of $2.5 billion, or $5.01 a share, down from $3.56 billion, or $7.09 a share, in the year-ago period. Revenue grew to $75.5 billion from $59.7 billion in the year-ago period. Analysts surveyed by FactSet had estimated $6.23 a share on revenue of $73.7 billion on average.

For the second quarter, the company said it could report operating losses of up to $1.5 billion, though the high end of its guidance was for $1.5 billion in operating profit, a wide range that shows the inability to project results in a difficult time. Analysts had expected more than $4 billion in operating profit in the second quarter, according to FactSet, but Chief Executive Jeff Bezos said he expects to spend that and possibly more.

The jump in expenses will come from spending “hundreds of millions of dollars” developing testing capabilities for all of its employees for COVID-19, starting with front-line workers; personal protective equipment for the company’s hundreds of thousands of employees; “enhanced cleaning” of its facilities; and “higher wages for hourly teams.”

Amazon, for example, has procured 100 million face masks to be worn by “all associates, drivers, and support staff in our operations network.” It has purchased more than 1,000 thermal cameras and 31,000 thermometers, which are being used to conduct mandatory daily temperature checks for employees and support staff throughout its operations sites and Whole Foods Market stores. And it has assembled a team including research scientists, program managers, procurement specialists and software engineers to build incremental testing capacity.

“If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small,” Bezos said in Thursday’s announcement. “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.”

Underlying strong demand for Amazon’s operations in online shopping, cloud computing and streaming video, the company went on an unprecedented hiring binge since mid-March in seeking 175,000 additional workers — most of them at fulfillment centers and delivery services. Those positions have been filled, including 95,000 in April.

“In our view, COVID’s impact accelerates the secular shift to e-commerce (U.S. e-commerce at 12% of retail sales) and Amazon is well-positioned to continue taking share,” Oppenheimer analysts wrote in a note Monday. They rate Amazon stock outperform with a $2,700 price target, up from $2,400.

The e-commerce business in the U.S. grew to sales of $46.13 billion from $35.81 billion a year ago, while the international e-commerce business grew to $19.11 billion from $16.19 billion a year ago. The international business remained unprofitable, reporting operating losses of $398 million while the U.S. business had operating profit of $1.3 billion.

Amazon Web Services sales improved to $10.2 billion from $7.7 billion as companies sought extra computing power to support remote workers. FactSet analysts on average had predicted $10.3 billion. AWS provided $3.08 billion in operating income, out of Amazon’s total of $3.99 billion.

Advertising sales remained steady, Amazon Chief Financial Officer Brian Olsavsky said in a conference call with analysts late Thursday, because most of them are tied to Amazon sales and not flagging sectors such as transportation. “There was a small pullback in March,” he said, in a nod to the impact of COVID-19.

Amazon’s bottom-line performance was “not altogether unexpected in light of the commerce business’s escalating costs of labor and delivery logistics, and shift in mix towards less-profitable categories like grocery,” eMarketer analyst Andrew Lipsman said Thursday. “The fact that the high-margin cloud and advertising businesses — both of which had downside risk — held up well, should help offset elevated costs in the commerce business over the next couple of quarters.”

Investors can expect Amazon to remain in spending mode, given the current economic and health uncertainty, analysts say.

“In this stay-at-home, social-distancing economy, Amazon is in a relatively good positioning with retail delivery, streaming and cloud services,” Christian Magoon, chief executive of Amplify ETFs and manager of the Amplify Online Retail ETF, told MarketWatch. “If there is a downside, it’s a downturn in retail, companies attempting to renegotiate AWS contracts to save money, and political risk around the [federal government’s antitrust] investigation into Amazon, and ongoing friction between President Trump and [Amazon CEO] Jeff Bezos.”

Amazon stock is up 30% in the past 12 months, while the S&P 500 index SPX, -1.92% has declined 0.2%.

Originally Published on MarketWatch

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