Amazon Expects To Expend All Of Q2’s Profit Fighting COVID-19

While Amazon earnings announcements over the years have become somewhat well known for their “expect the unexpected” atmosphere, yesterday’s earnings surprise was a big one.  A very big one — something Amazon clearly knew beforehand, since it prefaced the news in the quarterly earnings announcement thusly:

“If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small,” CEO Jeff Bezos wrote in the eCommerce giant’s earnings press release, before explaining Amazon’s plans to spend all of its Q2 profit, roughly $4 billion, on responding to the coronavirus pandemic.

“We are inspired by all the essential workers we see doing their jobs — nurses and doctors, grocery store cashiers, police officers, and our own extraordinary front-line employees,” he wrote.“The service we provide has never been more critical, and the people doing the front-line work — our employees and all the contractors throughout our supply chain — are counting on us to keep them safe as they do that work. We’re not going to let them down.”

That $ 4 billion, according to Bezos’ missive, will go toward items like PPE, enhanced warehouse and facilities cleaning, less efficient processing paths that better support social distancing measures, higher wages for hourly workers and “hundreds of millions to develop our own COVID-19 testing capabilities.”

In his remarks to investors after the statement went public, CFO Brian Olsavsky told investors that by the end of 2020, Amazon expects to have spent a full $1 billion on COVID-19 testing alone.  To support that push, he noted, the company has hired a team of researchers, engineers, procurement specialists and program managers to work on building incremental testing capacity throughout its system.  The company also notes it has begun testing front-line workers and will streamline the processing of those tests with a custom-built lab for that purpose.

Olsavksy also noted that while Amazon’s first priority will be getting its own people tested — at a cost of $300 million in Q2 alone — there is a possibility that once that milestone is cleared, it will be able to offer up its expanded capacity to others as “everyone is trying to get testing.”

Apart from the big, showstopping news, Amazon’s earnings hit the wires yesterday with lower-than-expected earnings but higher-than-expected revenue.  Amazon clocked in with earnings of $5.01 per share, notably before the $6.25 forecast pre-release.  But the firm’s revenue came in at $75.45 billion, comfortably ahead of the pre-release guidance of $73.61 billion.

Amazon Web Services revenue was expected to come in at $10.33 billion, based on FactSet estimates, though Amazon missed with a $10.22 billion result.  Still, that outcome marks the first time AWS has topped the $10 billion mark when it comes to revenue, pushed by the massive upswing in cloud service use as consumers have begun both working from home and netting most of their entertainment via the web.

For the quarter to come, Amazon is forecasting net sales to come in between $75 billion and $81 billion, which would put its year-on-year growth between 18 percent and 28 percent.  That pick-up, however, will be offset largely by an operating loss range of $1.5 billion to an operating income of $1.5 billion based on its expectation of spending $4 billion on coronavirus-related costs. In the COVID-19 free world of 2019, Amazon’s operating income was $3.1 billion at the same time last year.

As for what performed well, Olsavsky told investors that Amazon, after long struggling in the vertical, has seen a big spike in grocery sales, with its physical store sales figures up 8 percent year-on-year during Q1.  The vast bulk of that growth, he noted, came during March as consumers began stocking up en masse. Prior to March, he noted, growth in Amazon’s physical stores had been on track to increase about 1 percent.

Olsavsky also noted that the recent shipping delays were largely a result of inventory shortages, rather than issues with Amazon’s delivery logistics.

“It’s taking longer to get things into our warehouse than out of our warehouse,” he said, adding that it’s still unclear when operations will go back to normal. “The biggest questions we have in Q2 are more about the ability to service that demand and the products people are ordering in a full way,” he said. To that end, he noted, Amazon has now increased its workforce by 175,000.

But adding on was not the only thing Amazon did during Q2 in response to the global pandemic — the firm also announced that it was forced to suspend over 10,000 sellers from its platform for violating policies against price gouging.  Amazon, in highlighting its pandemic responses, also noted that AWS has been used by a variety of organizations, most notably the WHO, to run their coronavirus responses.

Bezos wrote in his note about the coming big push into COVID-19 response that though it will be costly, he also believes it will be worth it in a way long-term investors will understand.

“The best investment we can make is in the safety and well-being of our hundreds of thousands of employees. I’m confident that our long-term oriented shareowners will understand and embrace our approach, and that in fact they would expect no less,” Bezos wrote.

And while that might ultimately be born out, yesterday it seems they were expecting a little bit less humanitarian devotion, and perhaps a little more in the earnings column. Shares of Amazon stock fell 5.5 percent in after-hours trading.