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Amazon - sales boom but coronavirus costs hit profit

Sophie Lund-Yates, Equity Analyst | 1 May 2020 | A A A
Amazon - sales boom but coronavirus costs hit profit

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Amazon.com Inc Com Stk USD0.01

Sell: 141.16 | Buy: 141.17 | Change 0.53 (0.38%)
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Amazon's sales reached $75.5bn in the first quarter, up 27% at constant exchange rates and some way ahead of market expectations. That reflects substantial growth in both North American and International retail.

Despite the increased sales operating profit fell 9.8% to $4bn, slightly worse than expected. That reflects significant coronavirus related costs including protective equipment, enhanced cleaning and less efficient operations designed to achieve social distancing.

The group expects coronavirus related costs to increase next quarter, and operating profits will be between $1.5bn and -$1.5bn.

The shares fell 4.8% in after-hours trading.

View the latest Amazon share price and how to deal

Our view

Coronavirus is a huge tailwind for sales, but a problem for profits, as keeping Amazon's huge workforce safe and serving loads more orders cost a pretty penny.

But while some might balk at the potential for $5.5bn of extra costs next quarter, it's arguably the only way to go at the moment- and Amazon has always prioritised spending for growth.

For a company with sales of $280bn last year, Amazon already made surprisingly little profit. That's because the bulk of sales come from the retail business, which generates a comparatively modest profit margin, made worse by massive investment in next day delivery, and now coronavirus resources.

From a revenue perspective the retail business continues to go from strength to strength. While Amazon sources and sells many of its own items, many of the products sold on the website are actually third-party sales. These made up $53.8bn in sales last year. 'Fulfilment by Amazon' means many of these vendors pay Amazon for warehousing and delivery - generating extra fees too.

But while we all know about Amazon's retail operation, there's a far more profitable business hidden below the surface - and one that can grow pretty much uninterrupted despite the outbreak.

Jeff Bezos wants a culture of constant innovation and improvement to flow right through the group. While there've been numerous failures along the way (billions of dollars' worth, in fact), successes like Amazon's web services business (AWS) have far outweighed them.

AWS was born from one individual's frustration with the limitations of IT infrastructure. After being given the freedom to create a solution and run with it, it's since morphed into a $35bn+ business specialising in cloud computing. This gives partners storage space or extra computing power on demand.

The growth potential means, at the time of writing, the shares trade on a lofty 77.5 times expected earnings, making the share price particularly sensitive to disappointment. We should add that because of Amazon's focus on reinvestment in the business, there's no dividend on offer.

Overall the group is in a great position to be able to cater for the huge spikes in online shopping coronavirus has afforded. We don't have any concerns about the group's survival, and looking beyond the disruption, investors should focus on the big picture, which includes Amazon's enormous scale, cash resources and penchant for innovation. That will ultimately hold the company in good stead longer-term, but it could still be a rocky ride in the meantime.

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First quarter trading details

North American retail sales rose 28.8% to $46.1bn, while sales rose 18% in the International business, reaching $19.1bn. North American retail profits fell 43% to $1.3bn and International losses rose from $90m to $398m.

Amazon Web Services (AWS) saw sales rise 32.8% to $10.2bn, and operating profit increased 38.3% to $3.1bn.

Free cash flow in the second quarter was negative at -$3.7bn compared to a -$1.4bn outflow this time last year. Amazon finished the quarter with net cash of $25.9bn.

Prime Video launched Prime Video Cinema in the U.S., the U.K., and Germany. This is a rental service allowing customers to stream in-theatre movies at home.

Next quarter sales are expected to rise 18-28% year-on-year to somewhere between $75bn and $81bn.

Find out more about Amazon shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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