Investors believed Amazon would shield them from coronavirus-fueled recession. They were wrong. | Image: AP Photo/Ted S. Warren
- Although sales were up, Amazon’s Q1 results offered a grim warning for the future.
- Jeff Bezos told shareholders to buckle up for a bumpy ride.
- The firm could book a loss next quarter as it shells out billions to protect workers from coronavirus.
Amazon’s (NASDAQ:AMZN) highly anticipated Q1 results hit the markets Thursday–and it wasn’t pretty. The e-commerce giant delivered an increase in sales as lockdown restrictions facilitated a massive bump in online shopping. But CEO Jeff Bezos warned investors that there’s pain ahead as the firm navigates the novel coronavirus crisis:
If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small
AMZN Stock Gets Punished
Investors had been expecting big things from Amazon because the firm is so well-positioned to thrive amid the Covid-19 crisis. While the rest of the stock market is still struggling to recoup losses from the March drop, AMZN stock is trading 13% higher than where it was back in February.
Amazon has more than recouped its March losses. |Source: Yahoo Finance
But Bezos’ grim warning in the firm’s Q1 results is about to dull the shine on Amazon stock.
The firm’s share price was down 5% in pre-market trading as investors finally began to accept reality: Coronavirus is a headwind that’s not going away anytime soon. No one, not even Amazon, can escape it.
As expected, sales were up 26% in the first quarter, and unit sales, which measure the total profit per item sold, rose a whopping 32%. But despite the rosy figures, Bezos struck a somber tone as he warned that Q2 would likely be a nightmare for shareholders.
Bezos said he estimates spending in Q2 to top $4 billion as the firm combats the spread of coronavirus:
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
Coronavirus Spending Doesn’t Offer Growth
Typically, Amazon’s spending sprees yield growth, but in this case, it’s putting out fires. | Image: REUTERS/Andrew Kelly/File Photo
Normally, when Amazon starts spending value, investors start sniffing around the stock. While this isn’t the first time Bezos has announced that the firm was planning to reinvest its profits, this time they’re not funding growth. They’re financing pandemic protection.
Between keeping employees safe with protective equipment and reworking warehouses to ensure social distancing, Amazon is planning to shell out billions. The firm says it’s prepared to book a loss in Q2 because of the new measures.
AMZN Shareholders In For a Bumpy Ride
From a social standpoint, Bezos’ decision should be applauded. It’s not every day you see a company putting the needs of its employees ahead of its shareholders. But in this case, Amazon is doing just that. The $4 billion-plus investment that Amazon is making this quarter isn’t going to pay off later from a shareholder’s perspective.
Yes, it will help revive the firm’s image. It could also pay off in the medium-term as new models show we’re likely to continue dealing with coronavirus for the next two years. But overall, the spending does nothing to enhance Amazon’s business or create growth avenues in the future.
That’s going to tank Amazon stock and, in turn, the stock market. Amazon’s $1.23 trillion market cap means when AMZN stock declines, so does the S&P 500. Plus, investors are going to start questioning the strength of the current rally.
Amazon makes up a considerable proportion of the overall stock market, meaning a loss for AMZN is a loss for the S&P 500. | Source: YCharts / Irrelevant Investor
If a giant like Amazon, whose business is in a prime position, is planning to struggle, what can be assumed about the rest of U.S. firms that are in less fortunate positions? Amazon isn’t the only company that will be tasked with keeping employees safe. These are costs that will extend to several firms, many of which don’t have the added benefit of a bump in sales to support them.
The Bottom Line for Amazon
Of course, Amazon isn’t going to go under during the pandemic. In fact, likely the opposite. Even though spending on coronavirus protection doesn’t help AMZN’s long-term growth and the firm is entering it’s self-proclaimed “hardest period ever,” it’s is well-positioned to come out a winner in the e-commerce space.
Still, Bezos’ cautious tone is likely to inspire more fear than hope, and that could bring Amazon stock markedly lower in the days ahead.
Disclaimer: The views expressed in this article represent the author’s opinion and should not be considered investment advice from CCN.com. As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
This article was edited by Sam Bourgi.
Last modified: May 1, 2020 1:14 PM UTC
