Amazon’s ‘most important investment’ right now, according to a bullish analyst

 Amazon’s ‘most important investment’ right now, according to a bullish analyst

Amazon (AMZN) missed earnings estimates in the third quarter and is expecting more pain in the near term, which one analyst says are a sign that the company is spending now to set itself up for more upside later on.

“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 has a Buy rating and a $3,775 price target on Amazon. Shares of Amazon closed at $3,372.41 on Friday and are up 5.83% so far this year.

‘It’ll be expensive for us in the short term’: Amazon

Amazon posted third-quarter results and guidance that left Wall Street balking as the e-commerce giant forecasted billions of dollars in additional costs heading into the holiday shopping season.

“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,” Amazon CEO Andy Jassy said in the company’s earnings release. “It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners.”

Chukumba’s view is that Jassy’s decision was the right one, given the intense supply chain issues and labor shortages that the country is experiencing amid the economic recovery. Many employers have proactively raised wages to attract more talent on top of offering perks like paying for their workers’ education.

An employee pulls a cart at Amazon's JFK8 distribution center in Staten Island, New York, U.S. November 25, 2020.  REUTERS/Brendan McDermid.

An employee pulls a cart at Amazon’s JFK8 distribution center in Staten Island, New York, U.S. November 25, 2020. (REUTERS/Brendan McDermid.)

Supply chain issues continue to drag on as well. 

“We expect… strained supply chains to last until the early parts of 2023,” Peter Sand, chief shipping analyst at Copenhagen-based BIMCO, a shipping trade group, told Yahoo Finance in a previous interview. “We are basically seeing a global all-but-breakdown of the supply chains from end to end.”

The losses reported by Amazon on Friday were an acknowledgment by Amazon that “we have to pay our employees more. We have to give them the sign-on bonuses,” Chukumba said. “We’re seeing this sort of inefficiency in our supply chain and we’re going to eat it. We’re not going to pass that along to our customers. We’re not going to pass that along to our… sellers. We’re going to going to eat that.”

And ahead of the holiday season, choosing to stomach higher costs rather than raise prices is “quite frankly… the right decision,” he added.

Andy Jassy, CEO Amazon Web Services, speaks at the WSJD Live conference in Laguna Beach, California, U.S., October 25, 2016.     REUTERS/Mike Blake

Andy Jassy, CEO Amazon Web Services, speaks at the WSJD Live conference in Laguna Beach, California, U.S., October 25, 2016. REUTERS/Mike Blake

Amazon could raise Prime cost, prices in longer term

Longer-term, there are many options the company could take to recover many of these losses.

“It’s been over three years since they increased the price of Amazon Prime, it’s now $118 a [year]. I really think that they could increase that,” Chukumba explained. “I don’t think the vast majority of Prime subscribers would blink at that.” 

Another one of Amazon’s options would be to “increase their rates that they charge the third-party sellers and they could even increase prices on first party,” Chukumba said. “And by the way, we’re hearing from a lot of companies that, you know, consumers are not blinking at price increases.”

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.

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