Is It Tech or Retail? Confused Strategies Will Slow Growth in Amazon Stock

AMZN is a buy but brick-and-mortar missteps could dampen optimism

Amazon (NASDAQ:AMZN), like many tech stocks, continues to recover from the market’s late 2018 tech slump. The AMZN stock has risen by nearly 28% since its Christmas eve low. Moreover, the company is on track to deliver an expected 35.7% earnings increase this year. Rarely does a behemoth deliver such growth.

Is It Tech or Retail? Confused Strategies Will Slow Growth in Amazon Stock
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However, missteps in brick-and-mortar retail have weakened overall company growth. Investors who once assumed Amazon would take over all-things retail now call that belief into question. Although Amazon stock will likely continue to move higher, miscues on the retail front will probably slow the share growth.

Retail Amazon vs. Tech Amazon

Amazon stock has become a tale of two Amazons. Consumers think of Amazon as a retailer, the one that its peers should fear because they sell everything online and offers discounts at Whole Foods. Investors think it’s a high-growth tech company, one that’s engineered high profits on its Amazon Web Services (AWS) cloud platform. And, of late, it’s the company that leads the smart speaker market with the Amazon Echo.

This lead in tech only improves now that they use their extensive web presence to sell advertising. This makes up slightly more than 5% of revenues right now. However, AMZN looks poised to challenge the dominance and profit margins previously enjoyed by Alphabet (NASDAQ:GOOGL) and Facebook (NASDAQ:FB).

If the decision to invest were based purely on tech Amazon, I would take a decidedly bullish stance on Amazon stock. And why not? Thanks to the bear market in tech stocks, AMZN stock has decline to a forward price-to-earnings (PE) ratio of around 42. Moreover, thanks mostly to its tech presence, Wall Street expects profits to increase by an average of 43.8% a year for the next five years. Unless we know a market crash is coming, I would consider such a stock a buy.

Retail Struggles Could Hamper Amazon Stock

What gives me pause are the attempts to stop Amazon’s retail business from evolving into a mature, slow-growth enterprise. Amazon was an e-commerce pioneer and the most innovative retailer since Walmart (NYSE:WMT). However, Walmart matured and became a slower-growth business, often trading at low PE ratios.

As a retailer, Amazon has tried to avoid this path. Unfortunately for AMZN stock bulls, I think that effort to avoid slowing growth has made that fate more inevitable. Online revenues still grew by 14% year-over-year. However, outside of e-commerce, Amazon’s retail story is one of shifting strategies. Their recent decision to shut down the Amazon pop-up stores shows this.

However, a more-significant example comes from the grocery business. The decision to acquire Whole Foods and enter the online grocery business with Amazon Fresh stoked fear in Amazon’s peers. Now, Seattle’s Amazon has lost traction to Bentonville’s Walmart in the grocery business. Also, the company’s strategists may be questioning how Whole Foods can help them accomplish this goal. As Amazon ventured beyond books, they became a more generalized retailer. Conversely, Whole Foods stores serve an upscale niche focused on organic.

Now, Amazon wants to answer this with a separate chain of grocery stores. This leaves the future of Whole Foods as a part of Amazon into question. More importantly, competing head-on in a low-growth, low-margin business with the likes of Walmart and Kroger (NYSE:KR) seems like a strange strategy for a growth-oriented company. Moreover, in its most recent quarterly report, sales at its physical stores fell by 3%. Given their results so far, I can’t see where a high-growth success comes from this move.

Final Thoughts on Amazon Stock

Since so many investors think of Amazon as a retailer, missteps on that front could cloud their view on Amazon stock despite massive growth. The enterprise has become two companies, part vibrant tech enterprise, part maturing retailer. The tech side delivers the majority of its profits and profit growth. What started as a successful cloud business now encompasses smart speakers and online ads. The retail side revolutionized consumer shopping over the past decade-plus and still benefits from double-digit revenue increases. However, it could face struggles to find new sources of growth.

Amazon’s entrance into the grocery business initially stoked fear. Now, competitive struggles and shifting strategies could actually hasten Amazon retail’s move into slow-growth status. Since many consumers and investors think of Amazon as a retailer, such miscues could make investors less willing to support the higher PE ratios of AMZN stock.

Given the fundamentals, I have to call Amazon stock a buy. Still, I would become a more enthusiastic cheerleader if they prioritized tech over retail.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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