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Amazon’s profitless future
“The service we provide has never been more critical,” Jeff Bezos said yesterday when announcing Amazon’s latest financial results. Indeed, the e-commerce giant reported a whopping $75.5 billion in revenue in the first quarter, up 26 percent from the same time a year ago.
But profit fell faster than expected, as costs spiked to meet increased demand from homebound consumers. Mr. Bezos said that pandemic-related expenses would consume all of the company’s profit in the current quarter — and that it was part of a deliberate strategy:
“If you’re a shareowner in Amazon, you may want to take a seat, because we’re not thinking small. Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on Covid-related expenses getting products to customers and keeping employees safe.”
It’s a return to form, in a way, to when Amazon spent all of its cash to build market share instead of generating big profits. In the 20 years through 2016, Amazon made a cumulative net profit of around $5 billion — less than what it made in the past two quarters.
• With so much attention focused on Amazon during the pandemic, not least when it comes to the safety of its warehouse workers, choosing not to turn a huge profit could be seen as a shrewd move.
Today’s DealBook Briefing was written by Andrew Ross Sorkin in Connecticut and Michael J. de la Merced and Jason Karaian in London.
Berkshire’s annual jamboree goes virtual
Berkshire Hathaway’s annual shareholder meeting — known as “Woodstock for capitalists” — typically draws tens of thousands to an arena in Omaha to hear Warren Buffett’s musings on business, markets and life in general. Not this year.
Mr. Buffett will answer investor questions via livestream on Yahoo Finance tomorrow at 4:45 p.m. Eastern as part of an abbreviated, online-only shareholder meeting. (Andrew, CNBC’s Becky Quick and the former Fortune editor Carol Loomis will choose which questions to ask — DealBook readers can drop Andrew a line with suggestions.) Mr. Buffett and Greg Abel, one of his top deputies, will be on hand, though Charlie Munger, the company’s 96-year-old vice chairman, will be absent.
Expect a more subdued Q.&A. this year. Berkshire said that neither Mr. Buffett nor Mr. Abel would discuss “politics or specific investment holdings,” ruling out two popular topics at previous meetings. Mr. Buffett, who was more visible during the 2008 financial crisis, has been noticeably quiet about what the pandemic means for investment opportunities — Berkshire had more than $120 billion in idle cash at the end of last year. Mr. Munger recently told The Wall Street Journal, “We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity.”
What Mr. Buffett might talk about:
• Berkshire’s latest quarterly results, which will be released in the morning. Analysts expect a potentially huge loss, since investments in energy companies and airlines lost value and the retailers and manufacturers that Berkshire owns outright are operating at limited capacity.
• Economic inequality, a topic he has focused on in recent years. He told Yahoo Finance last month that “there’s no question” that capitalism “will widen the gap between the people that have market skills, whatever that market demands, and others, unless government does something in between.” He has supported a wealth tax in the past.
• His belief in the resilience of Berkshire and the U.S. economy. “He’s an optimist,” Paul Lountzis, an asset manager, told Reuters.
If banks hit certain lending targets, they can borrow at minus 1 percent. That is, thanks to a tweak to an existing stimulus program, they will owe the E.C.B. less than what they borrow from it.
The E.C.B. could follow the Fed and start buying junk bonds, notes Florian Hense, an economist at Berenberg. Ms. Lagarde’s pointed repetition of the word flexibility during a press briefing, Mr. Hense adds, also suggests that the central bank is willing to do more to unfreeze the economy.
The eurozone’s economy is in bad shape, according to the latest numbers. On an annualized basis, the way America reports its data, eurozone G.D.P. shrank more than 14 percent in the first quarter, versus just under 5 percent in the U.S.
Paul Krugman gives the Fed an ‘A’
The Times Opinion columnist and Nobel-winning economist was the featured guest on yesterday’s DealBook Debrief conference call, sharing his views on the government’s steps to help out Americans, what a recovery will look like and more. (Listen to the recording here.)
Good job, Jay. “The Fed gets an A,” he said, praising the array of bailout lending programs overseen by the central bank’s chairman Jay Powell. “What the Fed has done is incredible. If you looked at what was happening in the second half of March, we were right on the edge of a global financial meltdown.”
Don’t expect a quick recovery. “Very few people I talk to now believe in a V-shaped recovery anymore,” he said. “We’re looking at something more like a Nike swoosh with a long gradual ascent.”
New graduates are doomed. Asked when recent graduates would recover from the spike in unemployment, he responded bluntly: “Oh, that’s easy: Never.” He cited research showing that graduating during a recession permanently damages lifetime earnings. “You basically miss a rung on the ladder, and you never get to make that up.”
Apple thinks different
Apple easily beat Wall Street’s expectations yesterday by reporting a small rise in revenue and modest dip in profit. Even so, its C.E.O., Tim Cook, said that a “lack of visibility and certainty” made it impossible to estimate results for the current quarter, so the company couldn’t offer any guidance to investors about the future.
It was bullish enough to increase buybacks and raise dividends. Apple authorized $50 billion in share repurchases, on top of $40 billion left over from its previous buyback program. It also raised its quarterly dividend 6 percent. In both cases, to borrow one of its old ad slogans, Apple chose to “think different”: Most companies are desperately conserving cash, with analysts predicting that buybacks will fall by half and dividends by a quarter this year.
• Apple spent around $19 billion on buybacks in its latest quarter, and still had $40 billion in cash to spare. Over the past five years, Apple has spent nearly $280 billion repurchasing its own shares.
It’s not the only company going against the grain. Google’s parent, Alphabet, announced the largest buyback in its history this week. Although neither is immune to the effects of the pandemic — Apple’s supply chain and Google’s advertising business have been disrupted — the tech giants are confident enough to keep up generous shareholder payouts, despite economic uncertainty and rising public anger over companies’ use of cash.
Speaking of buybacks …
Steven Davidoff Solomon, a.k.a. the “Deal Professor,” argued this week that the backlash against share buybacks had gone too far. We asked for your thoughts on his take, and you responded in droves. (We read every email, even if we can’t reply to each one.) A selection of comments from DealBook readers:
• “That money should be going to making salaries and wages more equitable. No C.E.O. should earn more than 20 times the lowest salary in an organization.” — Andrea in Centennial, Colo.
• “You want ‘competition’ (i.e. options) for a corporation to deploy its excess cash flow to ensure it is utilized as effectively as possible — dividends, buybacks, M.&A., human capital, R.&D., new equipment, etc. Taking away one of those mechanisms will lead to corporate decisions becoming less efficient.” — Cameron in Toronto
• “What is the point in saving cash for a rainy day when the government is going to bail you out anyway?” — Burak in Australia
• “Part of the problem with the buyback debate is that it is framed as companies ‘spending’ money on them. Buybacks and dividends return money to shareholders that the company is not spending. Are buybacks the best way to return money to shareholders? Yes, for continuing shareholders if the buyback price is lower than the intrinsic value of the stock. But who is to say what is intrinsic value?” — Peter in North Salem, N.Y.
• “It seems to me you have presented the argument for regulation of stock buybacks. First comes outrage — why? Because abuses are exposed about the innocent being punished. And then comes regulation — why? Because there’s a need to curb the abuses and protect the innocent. Every mother knows that.” — Florence in Philadelphia
The speed read
• Boeing raised $25 billion in a bond offering and said it wouldn’t seek a federal bailout. (FT)
Politics and policy
• Several Republican-led states have threatened to end workers’ unemployment benefits if they don’t return to their jobs when lockdowns end. (WaPo)
• The coronavirus streaming boom appears to be in decline, having peaked in March. (NYT)
• The F.B.I. director Christopher Wray has called for tech companies to give the Feds to access to encrypted messages. Previously, as a private lawyer, his firm argued the opposite. (NYT)
Best of the rest
• Macy’s plans to reopen all of its stores in two months, and gave a snapshot of what the pandemic-era shopping experience will be like. (NYT)
• Cargo ships laden with unwanted S.U.V.s are having to anchor at sea. (Bloomberg)
Thanks for reading! We’ll see you next week.