Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: This is a breaking news update from Bloomberg instant reaction
Speaker 2: and analysis from our three thousand journalists and analysts around
Speaker 2: the world. I'm looking at shares of Amazon in the
Speaker 2: after hours. One number that really sticks out to everybody.
Speaker 2: Second quarter operating income outlook MISSUS thirteen billion dollars to
Speaker 2: seventeen and a half billion dollars. The estimate was for
Speaker 2: seventeen point eight two billion dollars. Let's get into it
Speaker 2: with Caroline Hyde. She's the co host of Bloomberg Technology
Speaker 2: on Bloomberg TV. Each day at eleven Wall Street time.
Speaker 2: She joins us here in the Bloomberg Interactive Brokers studio. Caroline,
Speaker 2: typically we'd be talking about AWS in any other quarter.
Speaker 3: That's crazy, that's not at all.
Speaker 2: I mean, for years, that's what we do AWS, that's
Speaker 2: what we care about. That's where the margins are. But
Speaker 2: then you have Liberation Day, so called Liberation Day, and
Speaker 2: now all anybody cares about is who's paying for these tariffs?
Speaker 1: But I suppose there's also still the focus on margins.
Speaker 1: The reason we care so much about AWS is it's
Speaker 1: the profit driver, right, But we're now worrying about a
Speaker 1: profit issue here with an operating income number coming in
Speaker 1: well below expectations, that breadth of guidance that they give
Speaker 1: us that almost like four billion wiggle room that's very normal.
Speaker 2: Is that operating income guidance is hit? Is that due
Speaker 2: to tariffs or is it due to competition? When it
Speaker 2: comes to AWS, I think.
Speaker 1: You have to work out also whether it's infrastructure spend Look,
Speaker 1: what happened with Meta was that they said, look, we're
Speaker 1: going to have to be spending more on our capital
Speaker 1: expenditure because the infrastructure costs are going to be a
Speaker 1: little bit higher. But profitability over mo'all is going to
Speaker 1: be sucked up by what ultimately they're going to have
Speaker 1: to pay for From a margin perspective, is it that
Speaker 1: they suck up some of the margin hit themselves to
Speaker 1: keep the consumer, which is in a vulnerable position, keep
Speaker 1: coming back to Amazon? Is it also that the third
Speaker 1: party sellers are going to be retrenching a little bit more?
Speaker 1: What was going to be happening to advertising? Because they
Speaker 1: did really well on advertising. But if you're seeing from
Speaker 1: some of these snap and the likes of others talking
Speaker 1: about the Chinese retailers, no longer wanting to be overall
Speaker 1: spending on advertising. Is that going to be taking in
Speaker 1: terms of the overall margin generation? And ultimately what does
Speaker 1: this mean in terms of how much a WS and
Speaker 1: its strength being able to prop up ultimately an e
Speaker 1: commerce side of the business that has to suck up
Speaker 1: a margin hit if they're going to be able to
Speaker 1: keep the consumer coming.
Speaker 4: We were kind of blown away, and I mean I
Speaker 4: went through the press release really quickly. I didn't see tariffs.
Speaker 4: Alex mentioned one, but it was kind of in the
Speaker 4: you know, the disclosure, like they didn't seem to touch it,
Speaker 4: and you can as touch it.
Speaker 1: Not touch it, even use the word tariff as a
Speaker 1: CFO of meta. They at least put tariff and trade policies,
Speaker 1: which are the only new lines in that forward looking
Speaker 1: guidance paragraph.
Speaker 3: All right, so but you know that's going to be
Speaker 3: top of mind.
Speaker 4: I know it's like kind of amazing, but I get it,
Speaker 4: I get it.
Speaker 3: I mean I.
Speaker 4: Don't know what what kind of color can we expect
Speaker 4: from them.
Speaker 3: I think there's so speculation. I mean, will they be
Speaker 3: able to really pinpoint the cost? What are they seeing
Speaker 3: at this point? Caroline?
Speaker 1: Because I think Andy Jesse did give an interview earlier
Speaker 1: in the month, well earlier in last month now and
Speaker 1: in April. Isn't it mad that it's made?
Speaker 3: But it's crazy looking back.
Speaker 1: And really he was saying, look, there's going to be
Speaker 1: horses for courses, there are some negotiations that were in
Speaker 1: the midst of and yes, maybe we start to try
Speaker 1: and push back and ask for ultimately the ultimate seller
Speaker 1: the Chinese celler. Remember, Amazon gets about seventy percent of
Speaker 1: its products from China, whether they're selling them on their
Speaker 1: own platform, whether they're selling them via third parties, and
Speaker 1: so are they going to pass that off on them
Speaker 1: if they're in the midst of a negotiation, maybe they do.
Speaker 1: But otherwise, if they're still got they've got the contract
Speaker 1: already existing, they're going to have to suck it up
Speaker 1: a little bit themselves.
Speaker 3: And we certainly know.
Speaker 1: That they're not going to be making evident how much
Speaker 1: the tariff is going to be adding to their prices.
Speaker 4: How do you roll that into right, that's the report
Speaker 4: that they.
Speaker 3: Were they really considering. I'm sure a lot of these things.
Speaker 1: That's the same with the as the story, and potentially
Speaker 1: maybe they have to consider a new CEO. At some
Speaker 1: point there's probably new smoke without far I'm pretty sure
Speaker 1: at some point the whole side of the business now
Speaker 1: sheans well and were making it evident how much twerffs
Speaker 1: are increasing. So probably you went internally, oh boy, that's
Speaker 1: what they're doing. Maybe we should consider something similar. But
Speaker 1: at no point was this signed off, and no point
Speaker 1: was this run up the ladder and them going oh yeah,
Speaker 1: if you go, stop making evidence. So I'm pretty sure
Speaker 1: that they are clear that this was not signed off,
Speaker 1: this was not agreed, But they have to be disive
Speaker 1: to consider it to be foolish not.
Speaker 2: To Amazon at least find it find itself in the
Speaker 2: position that this is not a story that's unique to Amazon.
Speaker 2: From the perspective of a retailer, a company such as
Speaker 2: Walmart and Target would have to go through the same thing.
Speaker 1: So true.
Speaker 2: What is different though, is Amazon's exposure for its cloud business.
Speaker 2: So we can't look at Microsoft as sort of a
Speaker 2: pure play comparison to Amazon anymore, or even Google Cloud.
Speaker 2: What does it mean that that Amazon it kind of
Speaker 2: doesn't matter if they have to raise prices to the
Speaker 2: extent of competition coming in and saying, you know, we
Speaker 2: can get this product for cheaper for elsewhere. Because if
Speaker 2: Amazon's prices go up from their suppliers I'm talking physical
Speaker 2: goods here that are sold through the retail site, everybody's
Speaker 2: prices are going to go up too. And that just means,
Speaker 2: you know, as American consumers who buy this stuff, we're
Speaker 2: the ones who are going to.
Speaker 5: Have to be paying.
Speaker 1: And that is trying to be what's told to the
Speaker 1: consumer base right now. Evidently this is going to be
Speaker 1: an inflationary pressure bag of American security is ahead of
Speaker 1: these numbers, put it really well, but basically, you know
Speaker 1: it's going to be the biggest focus is tariffs, and
Speaker 1: given that everyone's in the same boat, ultimately you're going
Speaker 1: to have the bet a little bit that Amazon's going
Speaker 1: to weather this better than anyone else. They've got the
Speaker 1: cash on the balance sheet, They've got potential ability to
Speaker 1: stomach some of the margin hit, much more so than
Speaker 1: a Wayfair or some others that are offering e commerce
Speaker 1: out there. And so yeah, Amazon is the one, perhaps
Speaker 1: in this difficult situation that you build on to write
Speaker 1: out the storm.
Speaker 4: But there's always the side too, because you know, the
Speaker 4: sev seventy percent of their goods, right, they come from China,
Speaker 4: whether it's directly or through you know, they employ Chinese workers, right,
Speaker 4: So I'm just curious, like, what's the Chinese perspective on
Speaker 4: Amazon and the importance it is to their economy?
Speaker 3: Do you mean everything of you know what? I don't know?
Speaker 1: And that's the key question for Shijingping is that ultimately
Speaker 1: how much do they have to support their own economy
Speaker 1: support some of their exporters at this moment. And I'm
Speaker 1: pretty sure that China has decided that they're going to
Speaker 1: fight fire with fire in many ways and decide that.
Speaker 3: If you want to cut us off so bit.
Speaker 1: But I think Amazon is the one in the position
Speaker 1: here that has to help with the renegotiations, has to
Speaker 1: stomach some of the margin hit in because we don't
Speaker 1: know where this is going for the next few months.
Speaker 1: At the moment, they're facing one hundred and forty five
Speaker 1: and twenty five percent tariff, right, Where does it go
Speaker 1: from here? How much are they able to change supply chains?
Speaker 1: So in the interim they probably stuck up the margin hit.
Speaker 1: In the longer term, how do they start to change
Speaker 1: as we've seen with Apple. Oh, Suddenly a lot of
Speaker 1: my goods are coming from India now, which other countries
Speaker 1: start to benefit. But you're right, what is their relationship
Speaker 1: like with their supplies? How are they trying to make things?
Speaker 3: What things?
Speaker 1: That's interesting with Amazon always they're not afraid to disappoint
Speaker 1: investors on profit point.
Speaker 3: They're sales. They're actually looking for it.
Speaker 1: The Decade podcast is good and resilient for sales. It's
Speaker 1: just they're saying, sorry, guys, suck up the operating margin.
Speaker 4: Hit the stack is now, I mean still down two percent,
Speaker 4: but it's not down for a five percent which it
Speaker 4: was before.
Speaker 3: It hasn't started, no, true.
Speaker 1: And they're talking all about the innovations. They're talking about
Speaker 1: the satellite side of the business. They're talking about putting
Speaker 1: sacks as an offering on the e commerce site. They're
Speaker 1: talking about what you can get in terms of AI
Speaker 1: innovations if you're coming to their cloud computing. Also their
Speaker 1: foundational models that they're going to aim at consumers too.
Speaker 1: They've got their own chips. They're going to try and
Speaker 1: talk up the resiliency of their business model when in
Speaker 1: the interim, yes, they might going to have to pass
Speaker 1: on some cost to the consumer base and the e
Speaker 1: commerce but the lag is somewhat It's.
Speaker 4: Just like, as you said, amazing, we would normally just
Speaker 4: like all of our AGAs.
Speaker 2: That's what we just kind of carried about. Caroline, you
Speaker 2: got to go TV as calling. They want to talk
Speaker 2: to you. Caroline is the co host of Bloomberg Technology
Speaker 2: on a Bloomberg TV eleven o'clock Wall Street time. Let's
Speaker 2: go continue on Amazon, specifically on the retail side. I
Speaker 2: want to bring on Punham Gooyle, senior analyst for e
Speaker 2: commerce at Leisure off Price Retail for Bloomberg Intelligence. She
Speaker 2: JOINSU from New York City this afternoon. Let's talk about
Speaker 2: this miss when it comes to second quarter operating income.
Speaker 2: The outlook there is that a result of tariffs. In
Speaker 2: your view, it.
Speaker 5: Has to be, because when I think about the operating
Speaker 5: margin that they just posted with AWS, you know, incredible
Speaker 5: near forty percent. The downside that we're seeing going into
Speaker 5: two Q, I can't think of anything else that could
Speaker 5: be driving that than higher costs that they'll have to
Speaker 5: absorb due to the tariffs.
Speaker 4: Are you surprised that, like we kind of you know,
Speaker 4: went through that press release, there's really nothing on tariffs.
Speaker 4: There's like that disclosure that kind of dumps everything at
Speaker 4: the very bottom of the page. Not surprise to see
Speaker 4: that they didn't really address it in the release, and
Speaker 4: I guess it's all going to come out on the call.
Speaker 5: Yeah, I think there's going to be a lot of
Speaker 5: questions about tariffs. Keep in mind that you know, Amazon
Speaker 5: is directly exposed on the one P side, so roughly
Speaker 5: forty percent of its business is where they do have
Speaker 5: to deal with tariffs. The other sixty percent, that's three
Speaker 5: P the sellers have to deal with them, but Amazon
Speaker 5: helps you set the price on its platform to make
Speaker 5: it competitive. So there's just a lot of back and
Speaker 5: forth that's going on, and with some suppliers they are
Speaker 5: working one on one to see where they can help
Speaker 5: offset the price increases. But the biggest delta between one
Speaker 5: Q and two Q is tariffs. So the guidance that
Speaker 5: we see here has to be a result of that
Speaker 5: that wide net that they've cast it.
Speaker 2: You mentioned the PS, but translate for.
Speaker 5: Us sure a third party and first party. First party
Speaker 5: when Amazon owns the goods, so basically they take on
Speaker 5: the cost and they directly source it from the supplier.
Speaker 5: Third party is if you and I go on to
Speaker 5: am done and we start selling stuff.
Speaker 2: What's the breakdown in terms of actual goods that are
Speaker 2: sold third party versus first party?
Speaker 5: Sure, third party we estimate is about sixty five percent
Speaker 5: and third and first party is about thirty five to
Speaker 5: forty percent. Okay, sixty four.
Speaker 2: And is there more like third party is more from
Speaker 2: China or do we not know than first party?
Speaker 5: Well we Amazon doesn't tell you how much they get
Speaker 5: from China, but just by looking at what's on their
Speaker 5: platforms and third party data, irrespective third party or first party,
Speaker 5: it's estimated that over seventy percent of what's sold on
Speaker 5: the Amazon dot Com platform is from China. So it's
Speaker 5: a large, large, large piece of their market place.
Speaker 2: Just to remind everybody, I mean you you you study
Speaker 2: e commerce at Leisha off price retail. This is you know,
Speaker 2: this is your world. This stuff is made overseas, like
Speaker 2: very little of it is made here in the US,
Speaker 2: very little.
Speaker 5: I mean food is the only thing we may procure
Speaker 5: locally that Amazon sells. Really everything else, the bulk of
Speaker 5: what you buy in retail in the US is made
Speaker 5: outside of the US. It doesn't matter who you are.
Speaker 3: What I don't know, Okay, I'll let him have a moment.
Speaker 3: You know what's interesting put in We kind of just
Speaker 3: laughed that.
Speaker 4: Normally when we're talking Amazon, we're all over Amazon Web
Speaker 4: services and it's like, oh yeah, that retail business. So
Speaker 4: what an interesting kind of report to go through and
Speaker 4: what we're focusing on. I do want to point out, though,
Speaker 4: that AWS reported first quarter sales gains seventeen percent to
Speaker 4: twenty nine point three billion, in line with analyst testaments.
Speaker 4: It was the unit's slowest growth in a year. So
Speaker 4: it does feel like, I don't know, like, what do
Speaker 4: we get out of that.
Speaker 3: I think it's okay.
Speaker 5: I mean, okay, I'm going to see businesses pull forward
Speaker 5: spend pulled back on spend. There's still a lot of
Speaker 5: momentum here on the AWS side. And really, you know
Speaker 5: why the sales were just in line. The margin was
Speaker 5: incredible thirty nine percent operating margins thirty nine point five
Speaker 5: percent roughly, that's huge. Consensus is looking for about thirty
Speaker 5: five percent. So we do that think, you know, this
Speaker 5: business will ab and flow and you'll have high margins,
Speaker 5: you'll have low margins depending on where they invest. But
Speaker 5: the long term potential of AWS is still pretty sizable,
Speaker 5: and there's a long runway here.
Speaker 2: Okay, So if we think about this in the context
Speaker 2: of what we heard from what we've heard from other
Speaker 2: companies thus far, what we heard from Microsoft yesterday, and
Speaker 2: as a reminder, I mean, you cover the e commerce
Speaker 2: at leisure, the off price retail. How do you think
Speaker 2: about this in terms of the retail world like the
Speaker 2: Walmart's of the world, the targets of the world. How
Speaker 2: does this report sort of inform the way we should
Speaker 2: be thinking about and investors should be thinking about those
Speaker 2: other companies.
Speaker 5: I think if Amazon's facing these tariff headmonds, so is
Speaker 5: everyone else, including Walmart, including smaller companies, medium sized companies,
Speaker 5: And really there is no escape from this unless we
Speaker 5: see things come from here. The one hundred and forty
Speaker 5: five percent tariff that you see on China is sizable.
Speaker 5: Now if that stays that way, the consumer is going
Speaker 5: to be paying higher prices. We will see some out
Speaker 5: of stocks on shelves in the coming months, as most
Speaker 5: companies have halted shipments from China, and it's not going
Speaker 5: to be an overnight switch to take everything that you
Speaker 5: make in China to somewhere.
Speaker 2: Else, or even impossible for something some analysts have said, well,
Speaker 2: you said empty shelves. Where are we going to see them?
Speaker 2: What do you think we'll.
Speaker 3: See them empty shells? But in like a drugstore. But
Speaker 3: I don't know that's.
Speaker 2: Because everybody stole everything there, Carroll, don't you know how
Speaker 2: this works?
Speaker 3: I know it's there was a little war perspective. Go ahead, Buno.
Speaker 5: Sorry, Well, you won't see empty shelves on Amazon, but
Speaker 5: you will see out of stocks. In fact, you know,
Speaker 5: I was just browsing the web randomly and I started
Speaker 5: to see some things that just said out of stock,
Speaker 5: like we'll let you know when it comes back. So
Speaker 5: I think you'll start to see inventory, especially that that
Speaker 5: comes out of China, be put on hold and we
Speaker 5: don't know when it'll come back. Because unless you raise
Speaker 5: the prices or double them, you're not making the same
Speaker 5: margin on what's.
Speaker 2: The consumer's willingness to pay for this stuff. Because, as
Speaker 2: I was mentioning to Caroline, if we see these price
Speaker 2: increases across the board, if we see them a Target,
Speaker 2: if we see them at Walmart, it's not like this
Speaker 2: is an Amazon specific story. We're going to see this everywhere.
Speaker 2: At what point does the consumer throw in the towel
Speaker 2: and say I'm not going to do this.
Speaker 3: I'm not going to pay.
Speaker 5: I think the consumer will say I'm not going to
Speaker 5: pay when prices go up thirty forty percent, Right, it's
Speaker 5: going to get more expensive. And if they say they
Speaker 5: don't pay, it means before they've bought ten things, now
Speaker 5: they'll buy three things. Where are they buying those three things?
Speaker 5: Are they going to trade down from a national brand
Speaker 5: to a private brand. Are they going to buy more
Speaker 5: staples that they can you know, like staple colors that
Speaker 5: they can reuse, recycle reware, and wear less fashion that
Speaker 5: goes out of style quickly. There's going to be trade
Speaker 5: offs if prices rise materially. That said, we do think that,
Speaker 5: you know, people will just switch brands, they'll switch options
Speaker 5: where they can get things cheaper. We're going into the
Speaker 5: back half in just a few months, and that's the
Speaker 5: peak selling season of retail. When you think about toys
Speaker 5: specifically right for the holidays, when you think of back
Speaker 5: to school, Yeah, I mean, what do you get your
Speaker 5: kids If you're not going to get them the barbie
Speaker 5: and you're not going to pay, you know, you can
Speaker 5: only get them.
Speaker 4: Two barbies thirty barbies only two dollars dolls. Sorry, no,
Speaker 4: I'm just repeating you know what we've heard. Hey, one
Speaker 4: last question I will say though, with the Amazon cart,
Speaker 4: like when you put them in and like you automatically
Speaker 4: see the value, like if things start to get more expensive,
Speaker 4: like you might pull back thirty seconds. Top question you
Speaker 4: think must be asked on the Amazon call?
Speaker 5: How are we weathering this teriff storm that we're going into,
Speaker 5: especially you know with three piece sellers. How are they
Speaker 5: going to control that? Amazon is still an attractive place
Speaker 5: where value is seen because they don't have a control
Speaker 5: on prices for everything.
Speaker 4: All right, Gonna leave it there, Hey, put them, Thank
Speaker 4: you so much, super super good conversation.
Speaker 3: Put them.
Speaker 4: Coyle, senior analyst for e commerce at Leisure, Off Price
Speaker 4: Retail for Bloomberg Intelligence. Shares of Amazon by the Way,
Speaker 4: which gave a weeker than expected forecast for operating profit
Speaker 4: in the current quarter.
Speaker 3: Off It's lows but still down.
Speaker 5: H