Amazon surpassed Wall Street’s revenue projections for Q3. Brian Olsavsky, CFO of Amazon emphasized that the company believes the high-volume demand will be sustained beyond the pandemic, and therefore the company is investing heavily in expanding. Investors, on the other hand, aren’t as confident and the high spending plans are drove them to sell the next day.
Amazon had a great quarter. COVID-19 drove extra business to the online retailer as shops closed and people stayed home. Net sales increased by 37% year-over-year to $96.1 billion in the third quarter. Net income increased by 197%. Earnings per share jumped to $12.37. Yet after the announcement, the stock price went in the opposite direction, opening down 3% the next morning.
“It’s usually the guidance that drives the stock more than the actual quarter results,” said Brian Yarbrough, an analyst at Edward Jones.
The guidance for the upcoming months informed us that COVID-19 has not been cheap and will continue to be expensive in the future. In total Amazon has incurred more than $7.5 billion in COVID-19 related costs, and it expects to incur an additional $4 billion in Q4. But the spending doesn’t end there.
Amazon is betting that the increased demand will be sustained for the most part and is growing fulfillment and logistics network space footage by 50% this year. The expansion created 250,000 new jobs in Q3 and already more than 100,000 in Q4. About $30 billion has been spent on capital expenditures this year and the spending will not decline in the near future.
“We’ve got to play the hand that we’re dealt, and we’re trying to anticipate and keep the customer insulated from any variability,” said Brian Olsavsky, CFO of Amazon. “But it’s challenging certainly.”
This is where the wariness creeps in. Will Amazon continue to see record-breaking numbers once things go back to normal? Will Amazon Prime continue to thrive once people can walk into a shop again? Will Amazon’s main source of operating income, Amazon Web Services (AWS) continue to experience the same demand once we can go back to our offices and have in-person interactions?
While these are valid concerns, a big part of Amazon’s success isn’t related to COVID-19. Amazon has been ahead of retail and cloud computing trends for years.
“For retailers to succeed they need three things, a unique shopping experience, differentiated merchandise, and to connect with their customers through some type of a loyalty program,” said Ivan Feinseth, an analyst at Tigress Financial Partners LLC.
Amazon has over 150 million Prime members globally and the renewal rates keep increasing every quarter. AWS also keeps increasing its client base and the advertising sales, recorded as “other income,” are back on track as of this last quarter.
Amazon plans to invest billions to expand during one of the greatest contractions of the American economy. While this seems excessively risky to many, it’s in line with what Amazon has always done and will continue to stay ahead of the trend.