Takeaway: It’s hard to see how AMZN does not come out the other end as a net share gainer at an accelerating rate across its businesses.

Overall this was a solid quarter for AMZN, all things considered.  A notable headline revenue beat accompanied by a margin/cost-driven EPS miss -- with revenue up 26% and EBIT down 10% YY. The market perhaps doesn’t like the profit result or profit guidance, but it should have been expecting it given what’s going on with the business in this time of heightened demand.  The business is focused on more 1P (lower margin) and necessity categories (lower margin) while investing in people and spending on cleaning and other procedures for Covid-19 precautions.  Demand led Amazon to hire and additional 175k employees in the last couple months, taking the growth in new employees to levels not seen in about 2.5 years and Amazon will likely hit 1mm employees by year end. Though the P&L may suffer over the short term, it’s hard to see how this time of disruption is anything but bullish for Amazon’s long term cash flow as ecommerce adoption rapidly accelerates and consumers that were potentially reluctant to get Prime or shop Amazon find new value in speedy/high frequency ecommerce shopping.  Amazon remains on our Long Bias list.

Trend

  • Revenue accelerated 560bps to +26.4% driven by strength in North America both online and in stores.  Online accelerated to 31.7% from 24.1% last Q, stores (Whole Foods) accelerated to +7.7% from -0.9% last Q.
  • International accelerated 500bps on an easier compare (+100bps on 2 year) and AWS slowed on both a 1 and 2 year basis growing 32.8% this Q vs 34% last Q.
  • Margins in 1Q suffered given $600mm in costs around Covid-19 compensation and operational procedures, plus $400mm in increased reserves for doubtful accounts.  Gross margin was down 184bps and operating margin was down 212bps. There was still a bit of incremental costs for 1 day shipping capabilities as well of about $1bn, even as shipping times extended in March.
  • Guidance on revenue implies a similar rate of change on the high end, but profits are expected to tank as the company foresees $4bn in costs in 2Q for Covid actions.  Still management sees anywhere from a $1.5bn loss to a $1.5bn gain in the upcoming quarter (excluding Covid expenses would mean ~50% EBIT growth YY in the quarter lapping the ramp of 1day shipping last year).  One of the big expenses might be management’s plan to do its own employee virus testing, an expected $300mm expense.  Amazon is putting a lot of money in to try protect employees and reward their efforts, ‘people’ costs make up the majority of that $4bn.
  • International is seeing some unique headwinds to revenue as India limits product availability to grocery only temporarily and in April French courts forced a closure of Amazon French fulfillment centers (goods can still be bought, just not through these specific fulfillment locations).


Tail & Ecosystem

  • The disruptions we are seeing are likely to benefit Amazon over the long term.  Ecommerce adoption is accelerating significantly.  Customers new and old are likely seeing the value of Prime. 
  • AWS sits in a great competitive position as a lower price and highest value cloud computing offering as companies globally see the value in cloud infrastructure as so much of business/commerce has shifted online with stay at home and work from home orders.
  • The suite of Amazon Prime’s product offering is becoming more noticeable as Amazon saw Prime Video viewers double in March, and listening grows.  Amazon added Prime Cinema, which allows for purchasing in theater movies for streaming at home.
  • Alexa is probably getting more use than ever before, and if she’s listening even when not addressed (which I think she is) just imagine the data being gathered with the American consumer at home all day for a couple months.
  • A once tough category for Amazon in online grocery becomes the fastest growing category in retail by far and Amazon invests rapidly to take its fair share. Amazon increased grocery delivery capacity by more than 60% and expanded in-store pickup at Whole Food stores from 80 stores to more than 150 stores.