Amazon Shipping Delays, Changes Could Carry Hidden Risks

Amazon is among the best-performing tech stocks of the coronavirus pandemic, but investors should be prepared for surprises in the coming months.
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Coronavirus has put Amazon -- and its sellers -- in a tight spot.

With consumers flooding online retailers for groceries and other essentials, Amazon has taken a number of unprecedented steps in recent weeks to manage the demand. Those measures include restricting non-essential shipments, postponing its annual Prime Day sales event and suspending its branded shipping service. Amazon  (AMZN) - Get Report shares rose 1.56% on Wednesday to $2,043.00.

“In a crisis, Amazon allocates resources to their proprietary market and services, and that may be a legacy issue that they have to deal with in the future,” said Christian Magoon, CEO of Amplify ETFs. 

It makes sense that Amazon has focused on making first-party deliveries of essential goods. But it’s also revealed vulnerabilities in its ecommerce infrastructure, and spotlighted its relationship with third-party sellers that depend heavily on Amazon for sales.

According to Internet Retailer, 36% of retailers are making changes to their marketplace strategies because of the pandemic -- and some Amazon sellers who have seen their sales plunge because of the company’s recent shifts are looking for alternatives.

“Merchants have to—and will continue to—make adjustments to their Amazon business as Amazon’s restrictions on shipments change,” wrote Fareeha Ali, research director at Internet Retailer, in a blog post.

Amazon’s stock is among the best performing large-cap tech stocks during the coronavirus pandemic, with shares up about 8% year to date as the broader Dow Jones has fallen 18%.

But investors should prepare for the possibility of surprises in the coming months, Magoon added.

From time to time, Amazon has been known to reinvest aggressively in its core business of ecommerce. That was the case in the June quarter of 2019, when Amazon’s net income fell short of forecasts owing to spending on costly new initiatives such as one-day Prime shipping. Amazon shares skidded about 11% in the week following that mixed report.

Likewise, Amazon may take this opportunity to again reinvest in its own ecommerce infrastructure. Three weeks ago, it announced plans to hire 100,000 warehouse workers -- and it’s possible they could do much more.

“I’m guessing they’re seeing an opportunity to double down and do better on their delivery side...they’re probably trying to jump start Whole Foods a little bit, too,” Magoon said. 

Given widespread instructions to avoid crowds, online grocery deliveries have seen a particular demand surge: Amazon, Instacart and Walmart  (WMT) - Get Report each saw a 65% increase in online grocery sales during the first week of March, according to Earnest Research.

Don’t be shocked if Amazon opts to buy out a brick-and-mortar retailer, Magoon added: With legacy chains struggling amid store closures, some investors are speculating that Amazon could pounce on a target like Macy’s  (M) - Get Report or Kohl’s  (KSS) - Get Report

In the longer view, Amazon’s handling of coronavirus demand some Amazon sellers who might be inclined to take their business elsewhere. Third-party sellers make up a growing percentage of its overall retail sales, but only 58% believe the company is “good for sellers,” according to a survey by Jungle Scout.

“It creates an opening,” for competing platforms, Magoon said. 

Amazon is a holding in Jim Cramer's Action Alerts PLUS member club