Amazon.com, Inc. (AMZN) stock did quite well for itself in 2015, more than doubling over the course of the year. For a company of its size, those sorts of gains are almost unheard of.
This year, investors have been less lucky.
AMZN shares are off 11% year-to-date, and that sort of underperformance could continue in the long-term if Amazon’s overseas growth prospects don’t improve. After all, while it’s true that Amazon dominates e-commerce in the U.S., the domestic market pales in comparison to the global market opportunity.
As a shareholder myself, I’m glad that Amazon has decided to master the U.S. market first. But growth hurdles in two of the world’s biggest markets, China and India, don’t bode well for anyone counting on international sales growth to boost AMZN stock.
It’s an age-old problem with massive companies: Eventually you get so big that you’ve got to venture outside your comfort zone to continue growing. Historically, AMZN has done this incredibly well: What started as an online bookstore in 1994 morphed into a retailer of everything you can possibly imagine.
Today, Amazon makes its own (wildly popular) electronics products, has a market-leading cloud computing platform, competes with Netflix, Inc. (NFLX) in streaming video and is helping to pioneer the development of artificial intelligence.
These efforts have gone a long way in driving AMZN stock higher over the years. But while Amazon is perfectly content entering new lines of business, it hasn’t been so great at excelling in new geographic markets.
In 2014, Amazon posted international sales of $33.5 billion, which was 37.6% of overall revenue. In 2015, overseas revenue grew just 5.7%, to $35.4 billion. Meanwhile, sales in North America grew 25.4% to $63.7 billion.
That sort of growth can’t go on forever. While there are roughly 320 million people in the U.S., there are more than 7.4 billion in the world, and more than 2.5 billion of them are in India and China.
Is AMZN Breaking Indian Laws?
CEO Jeff Bezos, you might say, is a smart man. He understands the importance these markets will play in driving AMZN stock, and has been investing heavily in India recently. So running afoul of Indian law isn’t exactly on his to-do list.
However, that might be precisely what Amazon is doing.
Some new Indian laws adopted last month state that no seller can account for more than 25% of sales in an Indian e-commerce marketplace. According to a New York Times expose published a few days ago, the largest seller on Amazon’s Indian site accounts for somewhere between 40% and 50% of revenue on that platform.
Getting on the wrong side of Indian regulators could prove a costly error for Amazon and AMZN stock owners. The company expects India to become its second-largest market next to the U.S. within the next decade. Analysts think e-commerce spending in the country will top $75 billion by 2020, up from $12.1 billion in 2015. It’s tough to find growth like that elsewhere in the world.
If AMZN is truly violating these new Indian laws, it will likely be forced to rejigger its marketplace in the country to essentially limit the amount that the large vendor sells. In turn, smaller businesses that may not have the ability or experience, or quality of product, will fill the void. One would also think it unlikely that these smaller vendors would be able to match the prices of a vendor of a larger scale.
Higher prices and lower quality will almost certainly drive customers increasingly to other e-commerce platforms and hamper AMZN’s growth potential.
It’ll be interesting to see whether the Indian government acknowledges the issue and whether it punishes Amazon as a result. With Amazon still unable to penetrate much of the Chinese market, where Alibaba Group Holding Ltd (BABA) and JD.com Inc(ADR) (JD) dominate the e-commerce industry, India is more strategically important than ever.
Investors should monitor the India situation carefully; if Amazon is forced to make huge operational changes quickly, or if it gets hit with a huge fine, that’s bad news for AMZN stock in the long-term.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
