Amazon (NASDAQ: AMZN) on the Cusp of Ending Its Scorching Bull Run? Morgan Stanley (NYSE: MS) Seems to Think So


Amazon (NASDAQ:AMZN) has, undoubtedly, emerged as one of the most prominent beneficiaries of the spatial distancing measures enacted across wide swathes of the globe in order to combat the ongoing coronavirus (COVID-19) pandemic. However, as some parts of the United States and Europe are now entering the plateau phase, characterized by a sharp deceleration in new infection cases, attention is now turning toward a gradual reopening of shuttered economies. This development has led Morgan Stanley (NYSE:MS) to issue a dramatic call today, asking investors to lock-in their unrealized gains by selling Amazon’s stock at the current price level.

Morgan Stanley observed in its latest investment note that was published today:

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"As perhaps the biggest and most obvious beneficiary of work from home, we think that trend has played out in the stock for the most part.

The note continues:

"Our fundamental analyst, Brian Nowak, remains positive on the stock and the long-term thesis, but after 27% relative performance vs. the S&P 500 and with the stock briefly exceeding Brian's $2,400 price target last Thursday, we lock in profits today."

Given the astonishing range of Amazon’s product portfolio, it is hardly surprising that the stock has remained resilient to the recessionary waves currently propagating through the breadth and file of global commerce amid the coronavirus (COVID-19) pandemic. Year to date, the stock is up by an astonishing 28.53 percent even as the broader S&P 500 index has tumbled by 11.03 percent in the same timeframe. Based on Friday’s closing price, Amazon retains a market capitalization of $1.13 trillion. Even in today’s pre-market session, Amazon’s stock is up by 0.79 percent, trading at $2,393.19 as of 08:28 a.m. ET.

In a testament to the coronavirus-induced panic and the corresponding boom in the online retail space, Amazon announced in the past couple of weeks that it would hire 175,000 new full and part-time workers across the U.S. in order to meet the surging demand on its delivery and logistics segment. This development follows a recent surge in online orders for the delivery of household items and medical supplies amid spatial distancing measures enacted to curtail the spread of the COVID-19 infections. Moreover, in order to ease the strain on its logistics, the company has declared that it will not accept new customers for grocery deliveries. Instead, all such prospective customers will now be placed on a waitlist for the time being as the company works to add capacity.

This hiring spree is not expected to come without attendant costs. As an illustration, Amazon will offer a $2 premium above its current $15 per hour wage rate across the United States. The company will also offer this premium in other jurisdictions, such as Canada and the UK. Consequently, the associated wage costs are now expected to balloon past $500 million.

Even so, the e-commerce behemoth does face moderate headwinds. For instance, small and medium-sized businesses are currently trying to curtail expenditure in order to secure their cash flows. This may lead to these businesses delaying their shift to the cloud, thereby, reducing the overall demand for Amazon Web Services (AWS). Bear in mind that this development will have a material impact on Amazon’s financials. As an illustration, the AWS segment contributed 67 percent of Amazon’s operating income in the fourth quarter of 2019. Moreover, the company has earned $9.2 billion in operating profits from this segment in 2019 alone.

Additionally, the new guidelines issued by the Trump administration to gradually reopen America’s shuttered businesses do indicate a forthcoming deflation, even if rather modest, in the overwhelming demand for Amazon’s e-commerce business. According to Trump, the U.S. now expects fewer deaths from COVID-19 than even the most optimistic of projections a few weeks back, necessitating a gradual reopening of businesses across America. Nonetheless, it should be noted that this process is expected to unfold at a glacial pace and is unlikely to cause a catastrophic plunge in Amazon’s online sales volume.

The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.