Amazon Q1 2020 – Pandemic blues.

Lack of a vaccine will hurt for some time.

• Amazon reported good results but disappointed shareholder by committing all of its profits in Q2 2020 to COVID-19 related spending sending a warning that costs are likely to remain higher until a vaccine is found.
• Q2 2020 revenues / EBIT were $75.4bn / $4.0bn ahead of revenue expectations of $72.6bn but in line with EBIT of $4.1bn due to the pandemic related costs incurred in March.
• AWS was a little disappointing rising just 33% YoY which is well below the jump seen by both Microsoft and Google.
• AWS is much larger than both of these put together and so high growth is much more difficult to come by, but I was expecting a bigger jump than this given what is happening in the cloud.
• This further underlines that it is Microsoft that is really on the front foot when it comes to the cloud at the moment while Amazon’ management is busy with the huge logistics operation.
• It is this that seems to have been taking up all of Amazon’s time as the challenge of ramping up activity to meet the increased demand as well as keeping all its employees safe is a massive, expensive and brand new problem to deal with.
• This is the essence of the Q2 2020 guidance which I suspect will continue for the foreseeable future until a vaccine has been found, tested and widely deployed.
• Prior to the pandemic, Amazon was hoping to generate around $4bn in EBIT in Q2 2020 but this will now be spent on keeping operations going while keeping employees and customers safe.
• Social distancing means lower productivity in its fulfilment centres as well as a requirement to have more staff and continually disinfect and clean its facilities.
• The net result is that Q2 2020 revenue / EBIT are now expected to be $78.0bn ($75.0bn – $81.0bn) / $0bn (LOSS$1.5bn – $1.5bn) way below the $1.1bn that was being forecast.
• There are many companies that are going to have to endure these sorts of cost increases until the population has largely become immune to SARS-Cov2.
• I think that it will be the end of 2021 before there is a vaccine that will allow things to go back to the way that they were before, which will derail Amazon’s fledging profitability once again.
• This time, it is not being derailed in order to invest in a new avenue of growth but as a necessary cost that has no return for the shareholder.
• While Amazon is one of the most perfectly positioned to benefit from increased revenues as a result of the pandemic, its profitability is going to take a hit for another 2 years or so.
• Hence, when it comes to profits, Microsoft is much better positioned as it does not have the profitability drag from an e-commerce operation to tie it down.
• This combined with its cheaper valuation and Amazon’s recent strong rally makes me prefer it once again.
• My once-in-a-decade-love for Amazon was short-lived (starting on April 3^rd and ending today) and I would look to get out of Amazon and put it into Microsoft instead.
• That being said, I remain vert nervous about equities overall and so I am far from convinced that I want to own anything at all.