Amazon.com Inc (AMZN) has been one of the few beneficiaries of the global economic disruption wrought by the Covid-19 pandemic. Yet, as I discussed in the first part of this analysis, Amazon has not sought to maximize its profitability during the crisis. Instead, the company has decided to deploy resources toward improving its market share and cultivating a favorable public image. Amazon is playing the long game and winning.
Short-term pain, long-term gain
When Amazon reported first-quarter earnings on April 30, analysts and investors were initially left feeling disappointed. Despite posting blowout revenues, profits fell compared to the same period last year. While revenue was up 24% year over year, net income was down 30%.
This was no accident. Rather, it represents a key piece of Amazon’s long-term-oriented strategy. During Amazon’s first quarter earnings call on April 30, CEO Jeff Bezos informed analysts that the pandemic would absorb all of the second quarter’s profit:
“If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small. Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on Covid-related expenses getting products to customers and keeping employees safe.”
By reinvesting, deploying or otherwise eschewing profitability in the first half of 2020, Amazon is setting itself up for bigger things.
Investing in market dominance
The Covid-19 crisis presented Amazon with a unique opportunity to refocus its efforts on all-out growth. With many investors, analysts and commentators effectively writing off corporate earrings in the first half of the year due to the anomalous impact of lockdowns, Amazon has been able to redeploy resources toward expansion and market share growth.
It appears to be a winning strategy. In a May 15 investor note, Bernstein analysts pointed out that Amazon has been “a clear beneficiary of eCommerce acceleration” and has essentially won the battle for distribution dominance:
“In typical Internet fashion, a winner-take-most model played out with Amazon now accounting for 40% of US [gross merchandise volume]...Amazon loyalists leaned so heavily into this channel that they broke it – with the company pivoting away from non-essential deliveries and hiring 175K more workers to keep up. Walmart and Target loyalists did the same thing to those retailers' nascent digital channels.”
Opting to focus on growth over immediate profitability is hardly new to Amazon. Indeed, it characterized the company’s core business strategy for much of its early history. The current crisis has simply allowed it to reopen its old playbook.
Bending the growth curve
Consumers and citizens rarely like it when a company profits from other people’s misery, and Amazon is clearly aware of that. Instead of profiting from the crisis, Amazon is laying the stage to profit from its expanded market share.
As Goldman Sachs (GS, Financial) analyst Heath Terry observed in his post-earnings update in May, Amazon has set the stage for accelerated post-crisis growth:
"We believe that the long term steepening of Amazon's growth curve driven by the acceleration of consumer adoption of ecommerce and enterprise adoption in cloud computing, enabled by the company's investments in fulfillment and infrastructure, and the associated high returns are likely to drive significant share price outperformance well beyond the current crisis.”
Amazon’s decision to shift its focus from profitability, even temporarily, is indicative of a shrewd long-term strategic vision, in Goldman’s assessment. I find it hard to disagree.
My verdict
By focusing on improving its reputation, Amazon can reap even greater rewards down the line. Even so, Amazon may be a hard sell for some value-oriented investors. With a market capitalization of $1.3 trillion and a share price flirting with an all-time high, a lot of this growth has likely been priced in already.
Ultimately, I must conclude that Amazon is on a course to greater market power. A steepening growth curve may well help buoy the richly priced stock still higher through the many months of recovery still ahead.
Disclosure: No positions.
Read more here:
- Airlines Face a Long Road to Recovery
- Hertz Moves Forward With First Ever Initial Bankruptcy Offerring
- Amazon: Not Letting a Good Crisis Go to Waste - Part 1
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