Cloud can’t save Amazon as pandemic boosts sales but costs sting profits
With expectations for Amazon.com Inc.’s quarter in the stratosphere thanks to potential benefits from the coronavirus pandemic, the retail and cloud computing giant had a lot to live up to today. It couldn’t.
Because of the high costs of trying to satisfy online commerce demands from customers sheltered at home and protect its own employees, Amazon reported lower-than-forecast profit. But it did manage to beat revenue expectations as people stayed away from most physical stores and shopped online.
The company reported a first-quarter profit of $2.5 billion, or $5.01 a share, down 30% from a year ago. Revenue rose 26% from a year ago, to $75.45 billion. Wall Street on average had expected a profit of $6.23 a share on revenue of $73.69 billion.
“From online shopping to AWS 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,” Jeff Bezos, Amazon’s founder and chief executive, said in prepared remarks.
Moreover, Bezos warned that the company has no plans to slow down despite the macroeconomic slowdown and will spend all of its second-quarter operating profit on COVID-19-related expenses.
“If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small,” he said. “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.”
By that, he said he meant “investments in personal protective equipment, enhanced cleaning of our facilities, less efficient process paths that better allow for effective social distancing, higher wages for hourly teams, and hundreds of millions to develop our own COVID-19 testing capabilities.” The cost of COVID-19 testing, for example, will be $300 million in the second quarter alone, Chief Financial Officer Brian Olsavsky said on a conference call.
Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, called out that spending. “I don’t think anyone can accuse Amazon of profiteering from the virus,” he said.
The Seattle-based company also provided a wide revenue guidance range for the second quarter, between $75 billion and $81 billion, bracketing a $77.94 billion consensus. But operating income, not surprisingly given Bezos’ comments, is forecast to range from a loss of $1.5 billlion to a $1.5 billion profit, either way far below the $3.8 billion consensus.
Shares of Amazon fell about 5% in after-hours trading. In the regular session, they had risen 4.3%, to $2,474 a share. The stock is up 32% so far this year. Update: On Friday, shares were down about 7.5%.
“The bottom-line performance was on the lighter side, but not altogether unexpected in light of the commerce business’s escalating costs of labor and delivery logistics and shift in mix toward less profitable categories like grocery,” said eMarketer Principal Analyst Andrew Lipsman. “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.”
As usual, in fact, Amazon Web Services Inc., the company’s cloud computing unit, led the way in profits, reporting an operating profit of $3.08 billion, up 38% from a year ago and more than triple the operating income of its retail side.
Cloud revenue grew 33%, to $10.2 billion, a percentage point below the fourth-quarter growth rate — continuing a multiquarter mild slowdown.
“Stay-at-home orders for workers and students has increased the demand for cloud services and accelerated companies’ digital transformation initiatives,” said Nucleus Research analyst Daniel Elman. “As a leader in cloud infrastructure and services, AWS is well-positioned to meet this demand.”
Indeed, he added, “Hitting $10 billion in quarterly revenue is significant and illustrates AWS’ massive scale — Google Cloud, one of its closest competitors, makes approximately $10 billion annually. As COVID-19 precautions look to persist through most of Q2, demand for remote, web-based services for companies and communities will continue to grow, bolstering Amazon’s cloud offerings.”
Moorhead noted that in absolute terms, AWS grew more in one quarter than the entire annual revenue of many cloud companies. Hitting that $10 billion quarterly mark, he added, “makes AWS larger than Salesforce.com and SAP.”
Costs take a toll
Amazon has been assumed to be a double beneficiary of the COVID-19 pandemic, as people forced to stay home have turned in huge numbers to Amazon’s online store and their companies have speeded up their moves to the cloud. However, it has struggled to keep up on orders, hiring 100,000 workers since mid-March with plans to add 75,000 more at considerable short-term cost.
Despite the revenue beat, those struggles may have had an impact. “E-commerce in the first quarter may have been held back by supply and logistics issues, which could have had a material effect,” said Martin Garner, chief operating officer of market watcher CCS Insight. “Possibly Amazon could have sold a lot more than it actually did.”
Costs took a toll as well. The company’s direct purchases of property and equipment, mostly driven by warehouse and other logistics investments, more than doubled from a year ago, to $6.8 billion, way up over the fourth quarter’s 42% growth.
Light at the end of the tunnel?
As other big tech companies such as Google LLC parent Alphabet Inc., Facebook Inc. and Microsoft Corp. showed earlier this week with their better-than-expected results, however, they may end up benefiting more than decimated small businesses when the economy starts to recover. And Amazon may come out ahead in the longer run as well.
“Amazon will likely realize downstream benefits from the stress placed on its fulfillment and distribution operations during COVID-19,” said Kunal Chopra, CEO at etailz, an Amazon third-party seller and e-commerce growth platform. “The sudden and drastic change in consumer buying behavior has exposed weaknesses in the system. By amending those weaknesses, Amazon will become even better at its core business: operations.”
Indeed, said Garner, “Amazon will see opportunity in the coronavirus crisis to strengthen its position in various markets. We expect it will be continuing to invest heavily in new features and services to help the world get back to a more normal set of conditions.”
More to come after a scheduled earnings conference call begins at 2:30 p.m.
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