E-commerce and cloud computing giant Amazon.com (NASDAQ:AMZN) has been one of the biggest winners in the COVID-19 health crisis. The stock has gained 28% year to date while the S&P 500 index fell 13% over the same period. Can Amazon’s bullish market momentum continue skyward, or…
is it time to step back and wait for a lower entry point?
Amazon’s market position
Amazon is clearly enjoying a rare turn in the global spotlight right now. Consumers around the world are shopping online to a degree never seen before, and this is a global leader in the e-commerce game. On top of that windfall, Amazon also sells cloud computing services and streaming entertainment platforms to a hungry world, which amounts to another couple of big upsides in this era of work-from-home and shelter-in-place policies.
As a result, Amazon’s first-quarter sales rose 26%, and the second quarter is shaping up for a 23% year-over-year gain on the top line. The company is experiencing holiday-season order volumes in what’s typically the slowest part of each fiscal year.
But CEO Jeff Bezos is not going to pocket the resulting cash flows for some rainy day in the distant future. The rainy day is right here, right now, and Bezos has committed to spending the next quarter’s operating profits of roughly $4 billion on COVID-related expenses. That includes extended bonus pay for Amazon’s workers, more cleaning supplies and personal protection equipment, and an investment in producing COVID-19 testing capabilities in-house.
“We’re not sure how far we will get in the relevant time frame, but we think it’s worth trying, and we stand ready to share anything we learn,” Bezos wrote in a prepared statement.
So the next quarter will see abnormally high revenue again, but earnings and free cash flows will almost certainly be printed in red ink.
A $4 billion marketing move?
The COVID-19 crisis should act as a springboard for Amazon’s long-term growth trajectory, which looked impressive even before the health crisis came along. The whole world is getting used to online shopping and remote work, accelerating the development of these important industries. Amazon may not chase profits at the moment, but the payoff from today’s business trends will last for many years.
The company can afford to sacrifice a couple of quarters’ worth of extra-large operating profits, and the act of setting those profits aside to fight the COVID-19 pandemic should frankly serve as a positive PR move. The company has its fair share of detractors, questioning details such as Amazon’s work/life balance and Jeff Bezos’ ballooning wealth. A significant anti-COVID investment gives Amazon some ammunition to fire back at that type of argument.
Is Amazon a buy today, then?
This is where I’m supposed to tell you to bet the farm on Amazon. The company is doing all the right things at a crucial point in the history of online shopping and cloud computing, and investors will enjoy strong returns in the long run if they pick up some Amazon shares today.
All of that is true, but I still don’t think you should buy Amazon today. In fact, this looks like a terrible time to buy almost any stock at all. You really want to wait for the next drastic market correction before backing up the truck to the buying window.
The coronavirus updraft has taken Amazon’s stock up to nosebleed-inducing valuation ratios:
And I’m sure that we haven’t seen the end of the COVID-19 crisis yet — not by a long shot. Businesses and local governments are starting to reopen way too soon, and another spike in infections and deaths is sure to follow.
But this time, we’re not starting from a handful of infected people in a previously unaffected society. This time, we have 1.4 million confirmed cases and…
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