Cowen Sr. Analyst John Blackledge joins Yahoo Finance Live to discuss Amazon earnings, the company’s pricing power, inflation and supply chain constraints, and the outlook for growth as the stock drops to its lowest level since 2014.
Video Transcript
JULIE HYMAN: Ines also flagged the move that we were seeing in Amazon shares today. And we want to take another deeper look into those Amazon numbers in its first loss since 2015. The quarter marking a rocky start to CEO Andy Jassy's reign, as post-pandemic forces and a stake in Rivian start to bite on the bottom line.
For more, let's bring in John Blackledge, Cowen senior analyst. And John, thank you so much for being here. As I was looking at this quarter for Amazon, what we've seen in the past when the company has posted losses or smaller profits, usually, it's it choosing to do so, making investments in various areas. This quarter felt very different. Does it-- are you confident that Amazon can get a handle on its expenses?
JOHN BLACKLEDGE: Oh, yeah, no, definitely. And it was a disappointing quarter. And let's maybe, like, start to break into that. Revenue was in line, but to your point, the operating income for 1Q missed. It was at the low end of their guide. And they cited three main reasons. One, inflation. Both gas, rising fuel costs, and also supply chain increasing pricing for containers, et cetera.
The second was just too much labor, right? They hired-- going into this year, they increased hiring because of the Omicron variant. And then when it subsided, they had too much labor and then overcapacity. They doubled their fulfillment network the last two years. They kind of knew that was going to be something because of the seasonality going from 4Q to 1Q, but all in, those three headwinds were $6 billion.
And then you go to the 2Q guide, the revenue was light. They called out still tough pandemic comp effects, and they are moving Prime Day to 3Q. That's about a $4 billion shift. And then, to your point, on the cost, the 2Q, op income guide was the biggest miss, a billion dollars at the midpoint. We were looking for $7 billion. And they called out some of those headwinds. Inflation's going to persist, and the overcapacity in the fulfillment network will persist for a couple more quarters, including second quarter.
So-- so, yeah, it was disappointing, but they really are near the tail end of this historic investment cycle, which speaks to your main question. Remember, I mean, Amazon spent $78 billion in retail capex the last two years versus $59 billion combined the prior five years. And they told us last night that the fulfillment capex is going to be down this year. That's 30%. And that transport, which is their middle and last mile logistics, will be down 25%. So, yeah, so we are in the late innings of this investment cycle, which is definitely a positive, as we run through this year.
BRIAN SOZZI: John, you may have missed it, but Julie and I got into a fiery debate on the cost of Amazon Prime. I'm going to toss this hot potato to you now. Do you think Amazon should be out there again this year, raising the cost of Amazon Prime, given the inflation they are, in fact, seeing? And not only should they, do they have the power with consumers to do so?
JOHN BLACKLEDGE: Oh, 100%. They've raised, I think, in '14 and 2018, and then they're raising in 2022. Think about what they've added since 2018. All the Prime Video original content. They added they're adding the NFL exclusive rights Thursday Night Football. They just bought MGM. So that's just on Prime Video. Then I just referenced the doubling of their fulfillment network and delivery speeds getting faster. And so [INAUDIBLE] and so much in the last four years. They have a ton of pricing power.
And also, basically, the churn for Prime is kind of like Verizon level churn, you know? So we believe the company really drives everything towards the Prime value prop. And they've added a lot of benefit the last four years. And so I think-- and they had ample room to add more.
JULIE HYMAN: I took the other side of this. So I got to jump in here, John. So just to be clear, they just announced they were raising prices to $139 from $119 for their annual plan. You think they're going to go higher than $139 this year?
JOHN BLACKLEDGE: No, no, no, it's $139. And then--
JULIE HYMAN: You think it's worth it, that price increase that they will not lose customers from getting in that price increase. Do you think it's going to go up more this year or next year?
JOHN BLACKLEDGE: No, no, they'll probably-- we're on a four-year cadence over a 12-year period. So I think it'll-- that will be it. Despite-- I know what you're saying, though. We have the recent inflation, but no, no, I think they'll keep it at $139.
BRIAN SOZZI: So but even if we are on a four-year cycle, let's say I thought potentially Prime can go up even more by the middle of next year. Do you think Amazon has the services and the service structure, like you just mentioned, where they could charge $200 a year for this?
JOHN BLACKLEDGE: Totally. Totally. This is dated, but going back four or five years, we just looked at it on an a la carte basis, what the value was. And it was, like, $450, $500, if you just unpacked everything. So-- and that was four or five years ago. So if we update that, I'm sure it would be more. So yeah, no, I think there's a lot of pricing power. And we had published a big deep dive report earlier this week. We do a lot of survey data on Amazon.
And one thing that we called out that I think is interesting is, in the first quarter, 17 million US households that didn't have Prime or pay for Prime bought something monthly on Amazon. And so there's a lot of potential for them to continue to increase subs. And all the things that we're talking about, what they're adding across the various parts of Prime, will lead to kind of more subs as we go forward. And yeah, no, certainly, they have pricing power for years to come, in my view.
JULIE HYMAN: Speaking of pricing power, just very quickly here, John, 42.50, your new price target on Amazon. That's still a lot of upside in the next year. How do we get there?
JOHN BLACKLEDGE: Yeah, we get there-- a couple of things. There were bright spots in the quarter, right? It's down 12, but there were bright spots. They did say the delivery speeds are kind of right where they were just before the start of the pandemic. You know, and so they're going to start to crank up one day and same day. Usually, when you put a faster delivery speed on a product, it drives higher purchase conversion.
And so you are going to get that as we round through the year and into next year. That coupled with easier comps, as we get in the back half of the year, is a good setup for top line. And then like we were just talking about, the historic investment cycle is coming to a close. And so you should have margin upside in the back half of the year and as we get into next year. And so kind of decent setup because we are getting into a zone after the second quarter, where it's going to be easing comps for four quarters. So but it is a second half story. And they have to show it. But we think they will.
BRIAN SOZZI: Thank you for supporting my case here. John, you're welcome on any time. John Blackledge, Cowen senior analyst, good to see you.
