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Amazon Is Preparing for Coronavirus Troubles. Should Investors?

By Donna Fuscaldo - Feb 25, 2020 at 6:50PM

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Amazon is stocking up on inventory to prevent supply issues if the coronavirus worsens, but will it be enough?

Amazon (AMZN 2.07%) is reportedly taking steps to get its hands on inventory as the COVID-19 coronavirus outbreak continues to spread, and worries about it becoming a pandemic rise.

Those fears have sent the broader markets plummeting, taking Amazon down along with it. Since last week shares of the e-commerce giant have lost more than 8%, and Amazon no longer sports a market capitalization of more than $1 trillion.

There's a good reason investors are spooked. Amazon sources a lot of products it sells on its marketplace from China, where plants have been shuttered and production for all sorts of products has slowed. It has even prompted Apple (AAPL 2.14%) to issue a warning for its fiscal second quarter. The iPhone maker blamed a slow ramp-up of production since the Chinese New Year.

Rendering of a coronavirus with the Chinese flag in the background

Image source: Getty Images.

Amazon stocks up

To address concerns about running out of stock of various products, Amazon has reportedly been placing bigger orders on a more frequent basis for Chinese goods being shipped to the U.S. The New York Times reported that Amazon is ordering six to eight weeks' worth of inventory on certain Chinese-made products, much longer than the average two to three weeks' worth of inventory it typically keeps on hand. Amazon's move to prevent inventory shortages is an early indication that the retail industry is worrying about the impact from coronavirus.

Most retailers have been quiet on the matter so far and have not issued warnings due to the outbreak. Walmart (WMT 1.85%), the world's largest retailer, said last week it doesn't anticipate a financial impact on its Chinese operations as a result. While there are no supply-chain issues yet, Walmart did warn at an investor conference that it could have an impact over the longer term. So far, retailers have avoided serious supply-chain issues, thanks in part to the U.S.-China trade war. Many stocked up on inventory before tariffs went into effect, but when China and the U.S. agreed to phase one of a potentially broader trade deal, they found themselves with excess inventory that can be used now to mitigate the potential of COVID-19 hurting production.

In addition to ordering extra inventory, some of the sellers on Amazon Marketplace have been curbing advertising, to prevent them from running into a situation where they don't have enough supply to meet demand. Amazon is even looking ahead to Prime Day, its one-day event in July when Amazon Prime customers get deep discounts on an array of items. According to The New York Times, this week Amazon reached out to brands via email, highlighting its concerns about Prime Day and inquiring about how coronavirus could impact supply.

Will it be enough as coronavirus spreads?

Amazon's proactive stance to prevent business interruptions amid the COVID-19 outbreak may not be enough. The number of cases increased rapidly over the weekend in South Korea and spread to other countries, including Iran and Italy. There are now growing concerns the world may have a pandemic on its hands. The new coronavirus has infected over 80,000 people worldwide, killing over 2,700.

In China, where COVID-19 first spread, there are concerns that scores of Chinese businesses may go under as the economy remains idled by the virus. A survey of small and medium-sized businesses in the country, conducted by Bloomberg, found a third of SMBs have enough cash to cover expenses for a month, with another third only lasting two months. Since the coronavirus outbreak, only 30% of SMBs in China have restarted their businesses.

Amazon credits itself with having a lean inventory model, but that may come back to haunt the e-commerce giant if the coronavirus epidemic worsens and can't be contained. If Amazon runs out of supplies, it could result in a dent in revenue for Prime Day, one of its biggest sales days of the year. But if its inventory management strategies prevent it from having any supply woes, and COVID-19 is contained quickly, then weakness in shares could present a buying opportunity. The risk lies in betting just how bad the new coronavirus ultimately will be.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Donna Fuscaldo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool recommends The New York Times. The Motley Fool has a disclosure policy.

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