The Ratings Game: Amazon could face renewed antitrust scrutiny due to COVID-19 sales, analyst says
The Ratings Game
Another analyst says Amazon is “doing all the right things for society”
Amazon.com Inc. could become the focus of antitrust questions over the site’s business practices, GlobalData says, as a flood of customers head online for goods amid the coronavirus pandemic.
Laura Petrone, a senior analyst at GlobalData, highlights allegations that Amazon
is promoting its own products over the ones from third-party sellers, which could put the company at risk of undercutting small businesses.
“COVID-19 has highlighted Amazon’s crucial role in delivering critical supplies, but it has also brought attention to the e-commerce giant’s competitive conduct,” GlobalData wrote. “The pandemic has revealed the flaws of a business model that forces third-party resellers to rely on Amazon’s platform, with no real alternatives available.”
As recently as January, analysts were raising concerns that Amazon could be at the center of antitrust allegations heading into the November presidential election. President Trump has been openly antagonistic towards Amazon Chief Executive Jeff Bezos.
But talk of antitrust investigations goes back years, with one hedge-fund manager, Doug Kass, saying the company’s expansion, business and pricing strategies were coming under scrutiny in 2017.
“COVID-19 is likely to reinvigorate the debate around competition in the digital era, particularly when it comes to defining market power and anti-competitive practices,” Petrone said. “Existing rules struggle to keep up with the challenges of the digital economy, where tech giants thrive thanks to their large, established customer network and low-cost capital.”
Amazon reported sales growth to $75.5 billion from $59.7 billion in the first quarter. Executives say customers are shopping more with them during the pandemic, but the costs of the activity are soaring.
“While customer demand remains high, the incremental revenue we are seeing on many of the lower ASP [average selling price] essential products is basically coming at a cost,” said Brian Olsavsky, Amazon’s chief financial officer, on the April 30 call, according to a FactSet transcript.
“We’ve invested more than $600 million in COVID-related costs in Q1 and expect these costs could grow to $4 billion or more in Q2.”
Stifel analysts headlined a note on the Amazon earnings, “Doing all the right things for society,” saying the company is positioning itself to gain market share.
“Since the onset of the pandemic, behavioral trends on the platform have been positive, with higher shopping frequency among Prime customers and larger basket size transactions,” analysts wrote.
“Prime members are also spending more time using Prime benefits, with the number of first-time Prime Video viewers doubling in March. The company’s online grocery offerings, Prime Now, Fresh and Whole Foods online have all seen increased demand that has continued through April.”
Stifel rates Amazon stock buy with a $2,600 price target.
MKM Partners thinks Amazon is poised not only to take market share, but to also help resolve America’s healthcare challenges.
“Post-pandemic, we believe Amazon will gain incremental market share in e-commerce and cloud computing during this downturn, while benefiting from accelerating adoption of online shopping of grocery and household items,” analyst Rohit Kulkarni wrote.
“This could lead to sustainable top-line acceleration over the near term. And, perhaps, Amazon’s experience with creating new processes and products for combating a pandemic might usher it into solving America’s healthcare problems.”
MKM rates Amazon stock buy with a price target of $2,525.
JMP thinks Amazon’s current spend is specific to the pandemic though there is the set up for long-term gains.
“[O]ur key takeaway is that we view most of these expenses as temporary, and not structural changes to the business. Not to mention, we view these investments as necessary and the right thing to do as more consumers rely on Amazon for everyday essential items,” wrote analysts led by Ronald Josey.
“While essentials are typically lower margin sales overall (and mostly 1P—as we saw this past quarter), strategically we view these sales as a longer-term tailwind and gateway for consumers to become more accustomed to, and comfortable with, buying more items across the Amazon ecosystem overall.”
JMP rates Amazon stock market outperform with a price target of $2,850.