Since the onset of the coronavirus outbreak, a few companies have emerged as the clear winners of the current stay-at-home economy. One of the clearest examples of this phenomenon is Amazon.com (AMZN). There was an abundance of anecdotal evidence that…
the company had become the platform of choice for those shopping online, including multiple hiring sprees and changes to long-standing policies.
Amazon removed any remaining doubt about just how well it was performing when the company reported its first-quarter earnings last week. Yet some of the news sent investors running for the exits and left others asking the seminal investing question: Should you buy Amazon stock right now?
Greater revenue, declining profits
Net sales in Q1 grew to $75.5 billion, up 26% year over year, an acceleration from the 17% growth in the prior-year quarter and its highest pace of growth since the third quarter of 2018. Excluding the unfavorable impact from year-over-year foreign currency exchange rates, top-line growth was even more robust, up 27%.
The bottom line didn’t fare nearly as well, with operating income slipping to $4 billion, a decrease of 9% year over year, while earnings per share declined 29%. It’s important to note that Amazon has been forced to make major changes on the fly, repurposing its fulfillment centers to focus on consumer staples and medical supplies, and hiring as many as 175,000 new employees, all while trying to protect its workforce from the COVID-19 pandemic — all of which comes at a cost.
Amazon Web Services remains the crown jewel of the company’s operations, up 33% year over year to $10.2 billion, while generating 30% operating margins.
Bezos: “You may want to take a seat”
While the results were impressive considering the circumstances, it was CEO Jeff Bezos’ striking candor about the path forward that caught investors off guard:
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.
Bezos went on to lay out the breadth of the company’s vision, which includes investments in personal protective equipment for employees, enhanced cleaning of its warehouses and fulfillment centers, and even instituting less-efficient processes that will encourage social distancing. Amazon is even going so far as to spend hundreds of millions of dollars to develop the company’s own COVID-19 testing capabilities.
He ended his prepared remarks by saying, “The best investment we can make is in the safety and well-being of our hundreds of thousands of employees.” This is classic Bezos. Many medical experts are predicting another wave of COVID-19 could hit in the fall, and Bezos is taking the long view and preparing for that possibility. This is a move investors should applaud, as it ensures a path forward even in the face of future challenges.
Valuation is a bit lofty
While Amazon’s stock has never been cheap, the run-up that has occurred since the outbreak began has taken it to even loftier levels. As of Monday’s market close, the stock trades at more than 118 times forward earnings, though this metric is no doubt impacted by the extraordinary expenditures outlined above. It’s a bit more palatable on a price-to-forward-sales basis, at just over 3.
To put that into the context of Wall Street’s growth expectations, analysts’ consensus estimates are calling for 27% growth next quarter, 22% for the current year, and slipping to 18% next year. It’s important to note that Amazon has frequently confounded estimates, and that factor is unlikely to change.
The seminal investing question
This all leads to the very legitimate headline question, “Should you buy Amazon.com stock right now?”
I would argue the answer is an unqualified “Yes.” Jeff Bezos continues to…
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