Amazon Affirmed Buy - but Beware Rising Expenses, Jefferies Says

Jefferies reiterated a buy rating on Amazon but warned that expenses could soon rise.
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Amazon's  (AMZN) - Get Report business is booming as consumers are forced to shop from home during the coronavirus pandemic, but the influx of revenue could soon be overtaken by rising expenses, according to a Jefferies note. 

The strain on the Seattle online retailing giant's fulfillment network is unprecedented. The company keeps expanding infrastructure to meet one-day shipping requirements for its Prime users. 

"The Covid-19 outbreak is causing a major shift in commerce activity to online retailers and putting extraordinary pressure on resources," analyst Brent Thill wrote. "In response, major players are hiring temporary associates to handle the surge in demand."  

Amazon said it planned to hire 100,000 workers in the U.S. to help with the sudden increase in work. The extra workers will help Amazon maintain the momentum from increased purchases on the site.

But there are also downsides to Amazon's strategy.

"The move ensures that AMZN stays open for business when authorities are closing nonessential businesses," Thill wrote. But "the move raises the risk of consumers moving to other websites for nonessential purchases,  and AMZN missing sales expectations, as well as target profitability as essentials tend to carry lower margins." 

Many of the company's expansion plans were already in progress before the coronavirus pandemic hit, but the outbreak could speed the execution of those plans. 

Jefferies has a $2,300 price target on the stock, which indicates 19% potential upside from the stock's Tuesday closing price of $1,940.10. 

Amazon shares at last check edged down 0.4% to $1,932.