Amazon Inc. (AMZN) - Get Amazon.com, Inc. Report shares traded sharply lower Friday after warning investors that while the coronavirus pandemic would likely lead to a record surge in revenues, related costs could tip the world's largest online retailer into a surprise second quarter loss.
Shelter-in-place orders, as well as working-from-home dynamics are likely to lift overall revenues past $80 billion, Amazon said, but with $4 billion in coronavirus-related costs -- essentially all of its estimated profits -- the group is likely to post its first quarterly loss in five years.
Amazon said its forecast range for operating income over the current quarter is between -$1.5 billion and +$1.5 billion, after earning $2.54 billion on revenues of $75.45 billion. Total expenses over the first quarter, in fact, rose nearly 30% from last year to $71.5 billion.
"While customer demand remains high the incremental revenue we are seeing on many of the lower ASP essential products is basically coming at cost," CFO Brian Olsavsky told investors on a conference call late Thursday. "We've invested more than $600 million in COVID related costs in Q1, and expect these costs could grow to $4 billion or more in Q2. These include productivity headwinds in our facilities as we provide for social distancing and allow for the ramp up of new employees."
"Investments in personal protective equipment for employees, enhanced cleaning of our facilities, our wages for our hourly teams and hundreds of millions of dollars to develop COVID-19 testing capabilities," Olsavksy added. "In Q1, we also had another $400 million of costs related to increased reserves for doubtful accounts. On the flip side, we did see a drop in travel, entertainment and meeting costs, as well as lower marketing as a way to dampen our demand for non-essential items."
Amazon shares were marked 6% lower in early trading Friday at $2,327.00 each. That move, while the biggest single-day decline since March 12, would still leave the heavyweight stock with a year-to-date gain of 27%.
Around $900 million of the cost increases will come from cleaning supplies and protective gear for its drivers and wearhouse workers, with $700 million more linked to wage increases. Amazon is also looking to hire another 175,000 worldwide employees to handle the surge in online demand triggered by coronavirus lockdowns.
That surge helped north American net sales rise 28.8% to $46.13 billion, while revenues from its Amazon Web Services division jumped 32.8% to $10.3 billion.
"While Amazon's first quarter earnings and second quarter guidance came up short of our expectations, we primarily attribute this to all of the 'moving pieces' in the company's business model given the ongoing global COVID-19 coronavirus pandemic (most notably, heavy incremental expenses)," said Loop Capital analyst Anthony Chukumba, who carries a buy rating on the stock with a $2,900 price target.
"In addition, we saw several positives in the 1Q 2020 results, including sequential top-line acceleration in North America, International, Whole Foods Market, and advertising and AWS YoY profit margin expansion."
"We continue to believe the current health crisis is likely to further accelerate two significant secular trends that are beneficial to the company: the shift to online retailing and the growth of cloud computing," he added.