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Long-time Amazon investors shouldn’t have been surprised by a jarring quote in the company’s first-quarter earnings report Thursday: “If you’re a shareowner in Amazon, you may want to take a seat.”
That’s because Amazon has been giving investors some version of that warning since it went public in 1997, letting them know it would prioritize long-term business advantages over short-term gains.
Amazon said Thursday it would invest its expected $4 billion second-quarter profit in coronavirus-related efforts, including buying personal protective equipment for workers, stepping up cleaning in its facilities and building its own testing capability. The company said that due to the investment, it expects operating income for the quarter to be as high as $1.5 billion or as low as a loss of $1.5 billion.
The bold step is reflective of CEO Jeff Bezos’ approach since starting the business.
“We believe that a fundamental measure of our success will be the shareholder value we create over the long term,” Bezos told shareholders in a letter shortly after its IPO. “This value will be a direct result of our ability to extend and solidify our current market leadership position.”
Even back then, with the stock trading in the low double digits, Bezos warned shareholders its decisions would not look like those of other companies.
“We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages,” Bezos wrote in the 1997 letter. “Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.”
Thursday’s earnings report acknowledged “these aren’t normal circumstances” and Amazon is “not thinking small.”
“There is a lot of uncertainty in the world right now, and the best investment we can make is in the safety and well-being of our hundreds of thousands of employees,” Bezos said in a statement in the earnings release. “I’m confident that our long-term oriented shareowners will understand and embrace our approach, and that in fact they would expect no less.”
On the company’s earnings call, an analyst asked CFO Brian Olsavsky why Amazon decided to build its own testing capability instead of outsourcing it. Could this be a new business line?
“I don’t know, again, about future business opportunities,” said Olsavsky. “Our main concern is getting testing in the hands of our employees. And then potentially as we have excess capacity, perhaps we can help in other areas.”
Prior to the pandemic, Amazon had undertaken other health-related projects, including research into a cure for the common cold. While Amazon wouldn’t acknowledge future business ambitions with its testing capabilities, it’s not hard to imagine the company creating a new offering if it has the resources.
“Amazon’s experience with creating new processes and products for combating a pandemic might usher it into solving America’s healthcare problems,” wrote analysts at MKM Partners in a note Friday.
“While these costs mean the current crisis is not driving profit upside, we believe it is creating opportunities for Amazon to strengthen its market position, while underlying ecommerce profit trends appear encouraging for longer-term profit potential,” Atlantic Equities analysts wrote.
Though the stock fell 7.6% Friday, alongside the news that members of the House Judiciary Committee want Bezos to testify on allegedly misleading claims, the vast majority of analyst notes available in FactSet rated the stock a “buy” with upgraded price targets. Several analysts lauded Amazon’s investments.
“In our view, Amazon’s management deserves praise for choosing to invest heavily to address the coronavirus outbreak on multiple levels rather than maximizing its short-term profits because of the demand surge it has caused,” analysts at DA Davidson wrote Friday.
The “key takeaway is that we view most of these expenses as temporary, and not structural changes to the business,” analysts at JMP Securities wrote. “Not to mention, we view these investments as necessary and the right thing to do as more consumers rely on Amazon for everyday essential items.”
Still, some analysts warned that some of Amazon’s new Covid-19 related expenses could become recurring. In a note about Amazon’s first-quarter performance, MKM Partners, for example, estimated recurring costs could be about $500 million.
Amazon has shown in the past that its heavy investments can pay off. Amazon announced last year its plans to invest $800 million in a single quarter to cut its two-day shipping promise for Prime members to one-day. The company said the investment would lower its profit margins, providing lower-than-expected outlook for the quarter as it beefed up warehouses and delivery infrastructure. Even as delivery times have expanded during the coronavirus pandemic, Olsavsky told analysts the infrastructure investments have helped it deliver goods faster than it otherwise could during the crisis.
“Most of our One-Day costs are really what we’ve done to our logistics networks to allow for One-Day shipping, things like putting inventory close to the customer, things like building up our AMZL [Amazon Logistics] network and delivery network and also having multiple pull times and shipping windows during the day,” Olsavsky said.
“All those things are coming in very handy to us to help get more capacity out of what we currently have. And we’re glad we made that investment.”
