What Is Amazon Spending Money On?

Amazon’s latest quarterly earnings report was its most dour in some time: the company missed Wall Street expectations and was accordingly conservative in its guidance for the usually blockbuster holiday quarter coming up (“Operating income is expected to be between $0 and $3.0 billion, compared with $6.9 billion in fourth quarter 2020”). It’s a bumpy start for new CEO Andy Jassy, but also a chance to set expectations that Amazon isn’t going to slow down its investments because of a bumpy quarter or two just to give shareholders a sunnier bottom-line view.

Jassy emphasized continuity, both for customers and leadership: “We’ve always said that when confronted with the choice between optimizing for short-term profits versus what’s best for customers over the long term, we will choose the latter—and you can see that during every phase of this pandemic.” But what, exactly, are the long-term investments that Amazon is making right now?

We’ve nearly doubled the size of our fulfillment network since the pandemic began. In the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs—all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season. It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners. — Andy Jassy

The cost that jumped out to me on a quick read of the quarterly report was property. Purchases of property were up from about $11B in the corresponding quarter in 2020 to almost $16B in this quarter, and $31B to $57B in the corresponding year. That’s the difference between a record quarter and a modest one, and a reminder that compared to most of its cloud counterparts, Amazon owns and operates a tremendous amount of property and equipment. It’s constantly building and planning to build new facilities, and in a turbulent real estate market, that costs real money (even with Amazon using its political connections and the hunger for jobs to help pull some strings).

The other top-line item eating into Amazon’s profits? Wages. I mean, on the one hand, this is obvious, a huge cost item for any business, and Amazon’s enormous workforce still earns only a fraction of the paper wealth Amazon generates. But apart from Jassy’s brief mention of it, and the gleanings we can find in the quarterly earnings report, Loop Capital analyst Anthony Chukumba sees wage growth as Amazon’s most important investment at the end of 2021:

"The most important investment that they're making is in wages," Anthony Chukumba, an analyst at Loop Capital, told Yahoo Finance Live (video above). Even after increasing workers' starting compensation from $15 an hour to over $18 an hour, adding benefits, and creating $3,000 signing bonuses, "they're still struggling," he added. "We're seeing all the same stories ... from so many different companies — it's becoming increasingly difficult to hire unskilled workers as well as to retain them," Chukumba explained. "You need to have these people in the warehouse, you need to have them on the trucks. Otherwise, the whole system just breaks down, quite frankly."

Chukumba is bullish on Amazon, seeing the wage investment as a means for Amazon to position itself both through the holiday season and keep the company more competitive when the mad fulfillment rush for most companies is over.

Both of these added costs come on top of the unusual and extraordinary extra costs of fulfillment as the supply chains continue to break down. Investing in wages, property, and equipment can help compensate for those shortcomings, but they’re a long-term response to a short-term problem. Amazon might uniquely be in a position to put those extra assets to work, even in 2022.