Amazon’s year could be weighed down by oil prices and end of stimulus: analyst

Diving brief:

  • According to Rohit Kulkarni, Managing Director of MKM Partners, Amazon’s operating environment has become increasingly complex, with stimulus payments ending this year and turmoil in Europe potentially weighing on revenue, and surging oil prices which increases costs.
  • At the same time, Amazon could benefit from a price increase on Prime and a fuel surcharge on third-party sellers using its fulfillment services, Kulkarni explained in a research note. Inflation on items sold could also add revenue from Amazon seller services.
  • The analyst lowered MKM Partners’ 12-month price forecast for Amazon stock by $100 per share.

Overview of the dive:

Kulkarni pointed to the many “moving parts” of Amazon’s business and the environment in which it operates today, as the war in Ukraine, prolonged supply chain bottlenecks and the inflation clash with the e-commerce juggernaut’s own business. The latter continues to grow in complexity as Amazon adds services, capacity, revenue streams, and a movie studio (especially the acquisition of MGM).

In the early stages of the pandemic, Amazon achieved three years of growth in 15 months, CEO Andy Jassy pointed out in his first letter to shareholders as head of the company. The company has also doubled the capacity of its distribution network, which has taken 25 years to develop, over the past two years.

Jassy described 2021 as a “crazy and unpredictable year”. The current year is proving no more predictable, given Russia’s invasion of Ukraine, continued inflation, and a consumer whose habits and attitudes towards the pandemic are still evolving. More in-person shopping, more spending on experiences, a more inflation-conscious consumer, and an end to stimulus measures could all weigh on Amazon’s revenue.

At the same time, the company, which has become a formidable logistician, is faced with the rise in oil prices, which Kulkarni estimated that this could weigh $4 billion on Amazon’s operating profit in the first half of the year. Meanwhile, 300,000 new hires in 2021 and additional cash compensation are also driving up costs, though the company may spend $8 billion less on COVID-19-related costs, according to Kulkarni.

The analyst also pointed to the potential costs of unionization among Amazon workers. The drive to unionize has been growing among the ranks of Amazon warehouse workers, with a union forming earlier this month for the first time at an Amazon warehouse in New York.

A union vote at a second facility in New York is approaching. Another petition for a union vote, in New Jersey, was recently withdrawn for unclear reasons, according to media reports. A second attempt to form a union at an Alabama facility failed, although objections filed by union organizers are still pending.

Steve R. Hansen