Amazon Doesn't See Demand Slowing Anytime Soon

It still has capacity constraints in its warehouses.

Amazon (NASDAQ:AMZN) hired 175,000 new workers amid the coronavirus pandemic. Now, it's offering 125,000 of those workers permanent positions if they want them, according to a report from The Wall Street Journal. "We still definitely have a need for more employees," a spokesperson said. That 125,000 figure is based on the long-term need of its warehouses.

In other words, Amazon doesn't see the heightened demand it experienced in March and April slowing down anytime soon. "Demand has been strong and the biggest questions we have in Q2 are more about ability to service that demand," CFO Brian Olsavsky said on Amazon's first-quarter earnings call last month.

Amazon typically does seasonal hiring ahead of Prime Day and ahead of the holiday shopping season. But sustained demand through May has already pushed Amazon's warehouses to its limits. It has taken several steps to actually curb orders, and its Prime shipping benefit still isn't back to the one-day delivery Amazon started offering last summer.

Accelerating the e-commerce trend

We should see a huge spike in e-commerce as a percentage of retail sales this quarter. Big retailers like Walmart and Target reported massive acceleration in online sales, while people avoided shopping in stores during widespread lockdowns. It's likely many of the online shopping habits developed now will stick around indefinitely.

An acceleration in e-commerce stands to benefit Amazon the most. It accounts for nearly 40% of the online retail market in the United States, and that market share continues to climb. Online retail sales have steadily grown at around 15% over the last few years, according to data from the U.S. Census Bureau. Amazon has drastically outpaced the overall market. North America sales, which mostly consist of Amazon's online marketplace, grew 29% year over year last quarter.

Amazon has notably taken steps to curb demand, making changes to its website and pulling back on marketing. The constraints on its ability to fulfill orders mean sales could grow more if it had the capacity in its warehouses and the man hours to fulfill all of the potential orders.

So while Amazon's sales growth of 29% is a far cry from the 74% and 141% posted by Walmart and Target, respectively, it's also handicapping itself and working from a considerably larger base. It's also worth noting Target and Walmart's quarters run from February through April, while Amazon's run from January through March. As a result, Amazon's competitors reported an extra month of COVID-fueled results.

Not letting off the gas

Olsavsky compared the spike in demand in March to the kind of spike Amazon sees for Prime Day or Black Friday. The only difference was, Amazon wasn't prepared for it.

While Amazon has had to push back Prime Day to September, it decided cancelling the shopping holiday altogether wasn't necessary. So if the spike in demand in March and April was similar to what Amazon sees for Prime Day, it would just need to rehire the tens of thousands of workers it just brought on. 

And with a late Prime Day, it's only a few more weeks until the November shopping season starts to ramp up. At this point, it makes little sense to lay off the temporary workers Amazon just hired.

What it all means for investors

Amazon's decision to keep most of its temporary hires in place and go forward with a delayed Prime Day means we're likely to see elevated revenue growth through the rest of the year. That said, costs will also be higher.

Not only does Amazon have over 100,000 more workers than it was expecting, it's also spending more to keep them safe. It's even developing a lab to develop and produce its own coronavirus testing. In its first-quarter earnings release, CEO Jeff Bezos said the company plans to reinvest all of its would-be profits into the company for COVID-19-related expenses. Meanwhile, there are additional costs related to delaying Prime Day.

But investors in this FAANG stock should expect Amazon to take chances to grow revenue at the cost of today's profits. The increased demand has had its pluses and minuses for Amazon -- it's certainly forced the company to make some major changes to its operations. But keeping most of the temporary hires in place should be a strong indication that management thinks elevated demand will persist throughout the rest of the year, and that should mean an overall acceleration in the shift to e-commerce.