Amazon (AMZN) has had a rough go of things in 2014, as evidenced by the stock’s 20% losses so far this year.
But while some of the AMZN stock declines can be attributed to the normal volatility expected from a sexy tech company with a high price-to-earnings ratio, it’s starting to look like Amazon.com has much bigger problems than just the normal ups and downs of sentiment.
AMZN investors have long banked on Amazon stock gobbling up market share in key areas, even while the company forgoes profits. However, there are signs that the nonexistent profits and razor-thin margins of Amazon could face even more pressure in the months and years ahead.
Here are five reasons AMZN stock investors should be worried:
Hachette Book Battle: Now, you might think Amazon has all the cards in a battle with book publishers seeing as it accounts for 67% of the e-book market via its Kindle platform. But the fact that publishers like Hachette feel like they can — or must — fight Amazon on pricing shows that even market share is not an ultimate insulator. The problem with being a content delivery company like Amazon is that you still must rely on content creators. Even if the Amazon-Hachette fight resolves favorably, the event itself is noteworthy for what it means.
AWS is Nice, But…: Bulls like to talk about the brisk growth for Amazon Web Services and how it has huge upside for AMZN stock. However, while the shift to the cloud is meaningful, it’s important to note that this is hardly a trend only Amazon has noticed. Microsoft (MSFT) has enterprise experience and is perhaps even more desperate to establish a presence in this market. Then there’s Google (GOOG), which continues to be the “everything” of the Internet and is increasingly eying business solutions as a growth opportunity. While there is certainly a big tailwind for the cloud, let’s not act like only Amazon Web Services will benefit — or that its growth won’t, once again, rely on a race to the bottom in price and margins in an effort to build market share. Just consider massive price cuts recently in the storage pace across AWS, Google, newbie Splunk (SPLK) and others as proof of this race to the bottom.
Hardware Headaches: As Brad Moon recently pointed out, the Fire TV gadget from Amazon that was released in April continues to be bundled with its Kindle tablet — presumably to get market share and bleed down the inventory. Once again, we are right back at margins — with the pair of devices offered for a mere $249. That’s nice for consumers, but also a big reason AMZN stock is facing a projected loss of between $410 and $810 million for the third quarter. It’s not just next quarter’s margins, though — the recent launch of an Amazon smartphone shows the company is going all-in with this ill-advised hardware strategy, which will drag on the stock for quite some time. I mean, after pushing its Kindle at cost for years, does Amazon really expect to make a profit on hardware anytime in the next year or two? Especially in the face of tough competition from Apple (AAPL) with a new iPhone set to hit the market and Samsung (SSNLF) continuing to give consumers a great Apple alternative with its Galaxy line?
Netflix vs. Prime: At the same time that Amazon is going head-to-head with cloud computing companies and smartphone giants, it’s also taking on streaming video king Netflix (NFLX) with its Amazon Instant Video offerings and even original programming. Netflix has admitted that it is bleeding cash big time in its growth plans abroad, proving how difficult it is to expand outside the U.S. And while it’s possible that consumers will opt for both services, if AMZN stock holders think it will be easy to claw share away from Netflix now that it is more dominant than HBO … they need to start being realistic.
AMZN Sentiment Stinks: It’s reductive but true: Many tech darlings go up in price today because they’ve gone up in price over the last few days … and similarly, a stock selling off continues to sell off. It’s very hard to time the change in momentum, but given the rather steady downward pressure on AMZN stock in 2014 and the continued negativity in the press, it’s unlikely that the bulls will take control any time soon.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
