I’ve been bullish on Amazon.com, Inc. (NASDAQ:AMZN) stock for some time now — and so has the market. Even with a 10% pullback in the last couple of weeks, the gains in Amazon stock have been incredible. AMZN stock is up nearly 50% just since late October. It has risen 65% in the past year — and has nearly quadrupled in the last three.
Admittedly, some of the gains have come because Amazon is a better business. Revenue doubled between 2014 and 2017. (Only 10 points of that growth came from the acquisition of Whole Foods Market; nearly all of the rest was organic.) Operating income rose by 23x, although 2014 GAAP margins were just 0.2%. Still, what already were steep earnings and revenue multiples applied to AMZN stock have expanded as well.
What’s driven that margin expansion is increasing optimism toward Amazon’s reach beyond retailing. Amazon Web Services has become a dominant cloud play. Rumors constantly swirl that Amazon will enter additional markets, among them healthcare, finance, advertising, and B2B distribution.
As bullish as I’ve been on Amazon stock, and as ardently as I’ve argued that focusing on AMZN’s P/E ratio alone is foolish, I am starting to become a touch skeptical toward Amazon’s supposed reach. The mere risk of Amazon entering a sector often has sent other share prices tumbling. And yet many of those affected stocks are starting to rebound.
In essence, investors in those sectors are saying the Amazon threat is overblown. If they’re right, Amazon stock could be as overvalued as some bears believe it to be.
Investors React to Amazon
The list of stocks impacted by the Amazon threat is simply too long to count. It was only a few years ago that Walmart Inc (NYSE:WMT) was the 800-pound gorilla of U.S. retail. That’s no longer the case. Indeed, the entire brick-and-mortar retail sector has seen multiples compress — and margins narrow, given the ‘omnichannel’ investments traditional retailers need to make to keep up with Amazon on price and service.
But even in Amazon’s core industry, there have been signs that investors don’t think Amazon will win everywhere. Shares of auto parts retailers AutoZone, Inc. (NYSE:AZO) and O’Reilly Automotive Inc (NASDAQ:ORLY) neared all-time highs this year before retreating with the broad market. Off-price retailers like Ross Stores, Inc. (NASDAQ:ROST) and Burlington Stores Inc (NYSE:BURL) are holding up in terms of results and stock prices.
A similar trend has taken place in adjacent sectors. Amazon’s supply chain was cited as a major risk to business-to-business distribution powerhouses W W Grainger Inc (NYSE:GWW) and Fastenal Company (NASDAQ:FAST). Investors feared Amazon would take market share and compress margins, leading profits to decline. Yet both stocks hit all-time highs earlier this year, recovering all of their AMZN-inflicted losses and then some.
Even AWS, while still growing at an impressive rate, is losing share to (admittedly much smaller) offerings from Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOGL). MSFT stock, in particular, has benefited from an investor belief that it will do just fine in the cloud race.
Obviously, the investors in these stocks could be wrong. But clearly Amazon isn’t winning across the board in quite the way that some expected — or feared. That may change at some point. As far as AMZN stock goes, it better.
What It Means for Amazon Stock
As bullish as I’ve been on AMZN stock, at these levels Amazon probably needs more success beyond retail, AWS and the Amazon Echo. And it’s fair to wonder if that success necessarily is coming.
It’s not as simple as just flipping a switch for Amazon to enter a market — even in retail. The auto parts companies have decades-long relationships with their suppliers. Off-price retailers have centuries’ worth of institutional knowledge in their buying teams alone.
Outside retail, Amazon casts a shadow — but hasn’t made many moves. It hasn’t entered the healthcare space in any real way yet, despite rumors of it challenging PBMs (pharmacy benefit managers), medical distributors like Cardinal Health Inc (NYSE:CAH), and even insurers. The Whole Foods acquisition sent grocery stocks tumbling — but it’s not clear that Whole Foods has notably changed its choppy sales trajectory under Amazon’s ownership.
So far, Amazon’s grand ambitions have been a lot of smoke — but not much fire. With Amazon stock now worth roughly $700 billion, that needs to change. The bull case for AMZN largely is based on that fact that its addressable market is almost limitless. It doesn’t require Amazon to win everywhere — and it hasn’t; remember the Fire Phone? — but Amazon needs to be more than just the world’s largest retailer with a valuable cloud business.
I still believe Amazon will hit that target. But at this price, and in this market, it’s fair to wonder how much success already is priced in — and just how patient investors will be.
As of this writing, Vince Martin has no positions in any securities mentioned.
