Reuters
- Amazon's ad business is expected to grow at a much slower pace than previous quarters because of slowing demand amid COVID-19, according to estimates by Morgan Stanley.
- Amazon's additional hiring in warehouse and delivery services, and the inefficiencies caused by the new workers are expected to add more costs this year, Morgan Stanley estimates.
- But the additional costs are expected to be offset by slower fuel spending for deliveries and less investments in building out its shipping infrastructure, it said.
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Amazon's advertising business — one of the company's hottest segments in recent years — is expected to see significantly slower growth this quarter as the coronavirus chills marketing activity on the site, according to a research note published by Morgan Stanley.
The investment firm estimates that Amazon's "other" business segment, which consists mostly of advertising sales, will grow just 13% to $3.4 billion this quarter. That's nearly a third of the growth rate seen in the year-ago period, when it expanded 37% to $3 billion in sales. The segment has grown at least 34% in the past five quarters.
The note said sellers and brands are buying fewer ads on Amazon because of slowing consumer demand, especially in non-essential products, during the coronavirus pandemic. Also, the essential products that are in high-demand, like hand sanitizers and face masks, need little advertising help to sell, it said. Some of those sellers have not been able to re-stock products that have been sold out, making it meaningless to buy ads too.
While Morgan Stanley expects a bounce back by the fourth quarter, it forecasts Amazon's other segment to record $17.8 billion in revenue for the full year, up just 26%, a notable slowdown compared to the year before when sales grew 39.4% to $14 billion in total.
Weakness in ad sales is one of the three main factors cutting into Amazon's overall profitability this quarter, according to Morgan Stanley.
The other reason is the increased hiring and wages for warehouse and delivery workers. Morgan Stanley estimates an additional $3.6 billion in costs for the quarter driven by the hiring spree and temporary raise. Amazon announced last month that it's hiring 100,000 additional workers, and said it's filled 80,000 of those positions last week. It's also giving a $2 per hour wage increase to its hourly workers through the end of April.
But the bigger loss is likely going to come from the warehouse/delivery inefficiencies and lower shopping demand. The note said Amazon could lose an additional $4 billion because of higher fulfillment inefficiencies resulting from new hire training and unexpected surge in demand for certain categories. On average, Amazon could spend $2.79 in fulfillment cost per unit, a 10% increase from last year, according to Morgan Stanley estimates.
Still, Morgan Stanley expects these additional costs to have a smaller than expected impact on Amazon's profitability, as other factors like savings in fuel and slower investment in delivery infrastructure could make up for the losses. All in all, the investment firm sees Amazon's earnings before interest and taxes, an important profitability measure that excludes interest and tax payments from the company's bottom line, to come in at around $22.4 billion this year, down just 5%, or $1 billion, from prior estimates.
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