01 May 2020

Amazon Fails to Deliver a Good Q1 Package

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What’s happening: Shares of Amazon slipped during after-hours trading on Thursday, despite the largest ecommerce retailer reporting better-than-expected revenue growth for the first quarter.

What happened: The coronavirus pandemic has driven strong demand for Amazon's services, as people remain homebound. However, the company has incurred massive costs during this period

The Seattle, Washington-based retailer added another $16 billion in sales in the first quarter, while costs weighed heavily on its bottom line. Amazon’s downbeat earnings and big spending plans for the second quarter pushed the stock down by almost 5% in extended trading yesterday.

How were the results: Amazon not only delivered robust revenue growth, it managed to beat elevated expectations.

  • Sales climbed 26.5% to $75.5 billion, beating the consensus estimate of $73.61 billion.
  • Earnings came in at $5.01 per share, representing a whopping 29.34% decline from the same quarter last year. The figure significantly missed Wall Street expectations of $6.25 per share.

Why it matters: Amazon saw a strong rise in grocery sales in March, with household staples and other essentials in high demand. The number of people streaming video for the first time on Amazon almost doubled last month, and subscription revenue climbed 28% to $5.6 billion during the quarter. Amazon’s cloud computing unit also reported solid demand due to an increase in distant education and online entertainment.

The COVID-19 outbreak has hurt brick-and-mortar stores, while online sales have surged. The trend of online shopping is expected to impact customer behaviour even when lockdown restrictions are eased. And, Amazon is the main beneficiary of this trend.

Amazon is among the handful of big retailers that have operated mostly normally during the ongoing crisis. While brick-and-mortar retailers were forced to close stores to avoid the spread of the virus, this online retailer hired 175,000 people to handle the surge in orders.

Amazon said that its sales could grow another 28% in the current quarter to reach between $75 billion and $81 billion. The company added, however, that profits may continue to decline. Amazon expects to incur a loss in the second quarter with plans of spending at least $4 billion on the coronavirus-related expenses. Management projected that operating income could range between a loss of $1.5 billion and a profit of $1.5 billion, versus $3.1 billion in profits reported in the second quarter last year.

“If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small,” CEO Jeff Bezos said. “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.”

How the shares responded: Shares of Amazon rose 4.3% in the regular session, but declined around 4.8% in extended trading on Thursday. The retailer’s stock has so far been immune to the overall stock market’s recent free-fall and has gained more than 32% over the past three months.

The Markets Today

     

Investors will be focusing on US stocks today, ahead of economic reports scheduled for later in the day.

Context: US stocks closed lower on Thursday, but still finished the month on a higher note. Mixed earnings reports from major companies and downbeat economic data weighed on investor sentiment in yesterday’s session.

Details: The Dow closed April on a strong note, rising 11.1% in the month. This represents the Dow’s best performance for the month of April since 1938. The Nasdaq 100 also recorded a monthly gain of 15.5%, registering its best April performance in history.

The US reported disappointing economic data on Thursday, reflecting the negative impact of coronavirus on the economy. The Labor Department disclosed that around 3.8 million jobless benefits were filed for the first time last week. The latest numbers took the initial jobless claims tally to over 30 million since the beginning of the COVID-19 pandemic.

Personal income also declined sharply in March, with workers receiving lower compensation from their employers. Income fell 2% last month, while consumer spending plunged 7.5% as people stayed at their homes.

In earnings news, McDonald’s reported downbeat profits for the first quarter, while sales topped views. Shares of Twitter plunged around 8% on Thursday, despite the social-media company exceeding first-quarter estimates. eBay’s shares rose over 2% after the online retailer reported higher-than-expected profits.

The Dow fell 1.17% to close at 24,345.72 on Thursday, while the S&P 500 index slipped 0.92% to settle at 2,912.43. The Nasdaq 100 index lost 0.28% to finish at 8,889.55.

In commodities news, WTI crude for June delivery gained 25.1% to settle at $18.84 per barrel, while gold for June delivery fell 1.1% to finish at $1,694.20 an ounce.

What to watch: Investors continue to assess the daily coronavirus numbers, with the total number of cases exceeding 3,259,160 globally. The number of positive COVID-19 cases in the US has surpassed 1,070,030 with around 63,010 deaths.

Markets await a basket of economic reports from the US, including manufacturing PMI, construction spending and ISM manufacturing index. The IHS Markit manufacturing PMI is expected to decline to 36.9 in April, from a reading of 48.5 in March. Construction spending, which fell 1.3% to an annual rate of $1.367 trillion in February, is projected to drop 3.5% in March. Analysts expect the ISM manufacturing index to fall to 36.9 in April, from 49.1 in March.

Other Markets: European indices were trading lower at 9:00am GMT, with the FTSE 100, German 30 and French 40 down by 2.4%, 2.2% and 2.1%, respectively.

Support & Resistances
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market snapshot

     

Futures at 0400 (GMT)

News shaping
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What else to watch today

     

South Africa’s total vehicle sales, India’s foreign exchange reserves, Canada’s manufacturing PMI as well as US Baker Hughes crude oil rigs.

 

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