Amazon's Near-Term Margin Profile Changes
Coronavirus-related investments change the wide-moat company's near-term margin profile, but also bolster network effect.
While most investors recognized the possibility of incremental costs to satisfy a surge in consumer demand, few anticipated Amazon's (AMZN) plans to invest more than $4 billion in the second quarter for coronavirus expenses (including facility productivity measures, protective equipment, cleaning, wage increases, and COVID-19 testing capabilities). While this changes our near-term margin outlook, we see it as necessary to satisfy/retain Prime members in an evolving consumer environment (especially those tempted to shop elsewhere because of fulfillment bottlenecks) and improve the third-party seller experience. These are critical to the network effect underpinning our wide-moat rating and justify the investment spending.
We have three takeaways from the quarter. First, management indicated many COVID-19-related investments would be temporary and would wind down as the situation dictates. While we expect COVID-19 investments to persist beyond the second quarter, some of the impact will be softened as Amazon laps last year's Prime one-day shipping investments. Second, Amazon should remain a critical distribution channel for buyers/sellers, even if recessionary conditions persist because of a product mix shift toward consumer staples in recent years (including grocery). Third, while AWS revenue growth was a bit softer than expected (chalked up to softness among customers in higher discretionary categories), margins improved 120 basis points to 30.1%. This suggests increased usage and new service adoption trends among existing customers, which help to negate the margin impact of near-term COVID-19 investments.
We're planning to raise our full-year revenue growth outlook to the mid-20s but cut our operating margin outlook to the 4% range (versus 5.2% in 2019). We're also planning a modest increase in our medium-term revenue outlook, which will result in a modest increase to our $2,400 FVE. We see shares as fairly valued, but don't see many downside catalysts on the horizon.
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R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.