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Why Amazon Stock Was Sliding Today

By Jeremy Bowman – May 1, 2020 at 10:41AM

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COVID-19 is costing the tech giant more than expected.

What happened

Shares of (AMZN -3.01%) were selling off today after the e-commerce giant missed the mark on the bottom line in its first-quarter earnings report, and said that investments related to COVID-19 would likely wipe out all of its operating profit in the second quarter.

The stock was down 6.1% as of 10:19 a.m. EDT on the news.

An Amazon Prime jet in a hangar

Image source: Amazon.

So what

Amazon stock had rocketed to all-time highs in recent weeks as it became clear that the company's sales have surged during the quarantine period. The tech giant has hired 175,000 people since the pandemic began, but the costs to the company to meet the surprise spike in demand and implement new safety protocols seemed to be greater than investors had expected.

Sales surged in the quarter, up 26%, or 27% in constant currency, to $75.5 billion, which beat estimates of $73.6 billion. However, spending on higher wages and other coronavirus-related costs led to operating income declining from $4.4 billion to $4 billion, and after a loss related to equity investments, adjusted earnings per share fell from $7.09 to $5.01, which missed estimates of $6.25. 

The biggest surprise in the report was that the company planned to spend an incremental $4 billion, what would have been its second-quarter operating profit, on COVID-related costs in the current period, including building a lab to increase testing, obtaining protective personal equipment including thermometers and thermal cameras, and paying higher wages through May 16.

CEO Jeff Bezos said, "The current crisis is demonstrating the adaptability and durability of Amazon's business as never before, but it's also the hardest time we've ever faced." He also foreshadowed innovation to come, saying, "If you're a shareowner in Amazon, you may want to take a seat, because we're not thinking small."

Now what

Amazon's guidance for the second quarter was characteristically broad, calling for revenue of between $75 billion and $81 billion, representing 18% to 28% growth, and operating income to fall between a loss of $1.5 billion and a profit of $1.5 billion, compared with a $3.1 billion operating profit in the year-ago quarter.

The guidance shows that the pandemic is likely to eat into Amazon's profit for the foreseeable future, beyond the current quarter, as the company makes investments to ensure the safety of its workforce and to adjust processes and supply chains according to new demands.

Though it's the right move for the long term, it shows that the pandemic isn't the windfall investors might have hoped it would be.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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