In early June, Amazon.com, Inc. (NASDAQ:AMZN) shares broke the $1,000 mark. The move was more than just a psychological milestone. After all, the return for AMZN clocked an impressive return — for the year — of 35% and its market capitalization hit $482 billion.
But the $1,000 level has proven elusive. During the past week or so, Amazon shares have fallen about 5% or so.
Because of this, CEO Jeff Bezos saw his net worth drop from $86.5 billion to $82.8 billion over a few days (he owns roughly 79.9 million shares of AMZN stock).
Now it’s true that AMZN stock has a tendency to bounce back. But even great companies are not immune to troubles. Amazon is no exception.
There are certainly some major risks and challenges, but which ones are the most serious? Let’s take a look at three:
Amazon Concern #1: Mega Tech Bubble
For the year so far, the lion share of Wall Street gains have come from the red-hot FAAMG stocks, which include Facebook Inc (NASDAQ:FB), AMZN, Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). Yet, this trade is starting to look bubbly.
Last week, Goldman Sachs analyst Robert Boroujerdi put out a stinging report, writing the following:
“This outperformance, driven by secular growth and the death of the reflation narrative, has created positioning extremes, factor crowding and difficult-to-decipher risk narratives (e.g. FAAMG’s realized volatility is now below that of Staples and Utilities).”
But there are also other catalysts that could weigh on the FAAMG trade. The Federal Reserve increased interest rates and is taking hawkish actions to lessen its balance sheet. What’s more, there are the political uncertainties in the U.S. with the Trump administration, which has had difficulties enacting its pro-business agenda.
The problem is that when a crowded sector comes undone there can be a brutal move to the downside. The most notable example is the dot-com implosion in 2000.
Amazon Concern #2: Overstretch
To keep up the growth, Amazon CEO Jeff Bezos has pushed aggressively into various categories. But of course, this has meant that the company has gotten much more complicated. Let’s face it, industries like entertainment can be extremely volatile.
But there are also expensive bets into foreign markets, like Australia, India and Mexico, where the competitive landscapes are intense. Oh, and Amazon is even building its own delivery service to rival entrenched operators like United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX)!
In light of all this, can Amazon really provide top-notch service to its customers? Or might the quality start to deteriorate?
I think these questions will be critical to AMZN stock for the coming years. After all, the tech industry is replete of examples of dominant companies that have lost their way because of overstretch, as seen with Cisco Systems, Inc. (NASDAQ:CSCO) and AOL.
Amazon Concern #3: Cash Cow Threat
The critical part of Amazon has been its thriving cloud business, which is called Amazon Web Services (AWS). It has essentially provided the bulk of the company’s profits, as the e-commerce business has generated slim margins. As a result, AWS has allowed the company to finance its ambitious efforts across multiple market opportunities.
But it is important to keep in mind that AWS is slowing down. Part of this is that the revenues have reached hefty levels. Yes, there is the problem of the “law of large numbers.”
However, there is also the intense competitive environment. Companies like International Business Machines Corp. (NYSE:IBM), Oracle Corporation (NYSE:ORCL) and Hewlett Packard Enterprise Co (NYSE:HPE) are doubling down on the cloud opportunity. Although, the biggest threats are likely to be MSFT and GOOG, which have been making great strides in the market. They have trusted brands, global infrastructures, massive customer bases and broad offerings of business apps.
So if the deceleration continues with AWS, it’s going to hamstring the growth ramp of AMZN — ultimately weighing on the shares.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
