It’s not a great time to be an owner of Amazon (NASDAQ:AMZN), especially for longer-term investors. Amazon stock has a bigger uphill battle ahead than you might imagine.
The company is facing tremendously increased competition, spurring it to spend much more on its logistics business. Its divorce from FedEx (NYSE:FDX), along with tremendous antagonism from the Trump administration, has created a large amount of uncertainty.
CEO Jeff Bezos just sold billions of dollars in stock, the growth of its cloud unit is slowing notably, and most of the company’s recent initiatives haven’t produced notable results.
Let’s take a more detailed look at each of these reasons for selling Amazon.
Reason to Sell Amazon Stock: Beefed-Up Competition
Many companies have copied Amazon’s free shipping, a very easy-to-navigate website, two-day delivery and low prices. As a result, AMZN’s ecommerce business is facing an unprecedented level of competition.
Confronted with this meaningful threat, Amazon responded by spending a tremendous amount of money to implement one-day shipping on many items.
“We believe the move (implementing one-day shipping) is consistent with Amazon’s long-standing goal of convenience and selection, but also likely reflects the increasingly competitive retail environment,”
Nonetheless, JPMorgan did keep an Overweight rating on Amazon stock and increased its price target on the shares to $2,200 from $2,050.
But despite JPMorgan’s optimism, anyone who believes that Amazon’s one-day shipping initiative will give it a huge leg up on the competition is likely incorrect.
Quotes in the same story, research firm Quo Vadis pointed out, “Large retailers have anticipated this for some time and are already rolling-out corresponding services.”
So Amazon is shelling out a great deal of money to implement one-day shipping, but one-day shipping probably won’t enable it to beat the competition.
Reason to Sell Amazon Stock: Increased Uncertainty
FedEx recently decided to stop providing shipping services to Amazon. The Motley Fool noted, “FedEx accounts for a relatively small percentage of Amazon’s last-mile delivery compared to UPS (NYSE:UPS), USPS (the U.S. Postal Service), and Amazon’s private contractors.”
So FedEx’s move probably won’t hurt Amazon’s ecommerce business much for most of the year. But during the holiday season rush, when Amazon’s shipping volumes go up exponentially, the divorce is likely to have some impact on Amazon’s reliability.
And FedEx’s move comes at a precarious time for Amazon. Trump has tremendous antagonism towards Amazon, and I’ve warned that Trump’s antipathy could very well damage Amazon stock.
But the danger for AMZN has greatly increased since the beginning of this year. That’s because, whereas previously, Trump’s chiefs of staff and attorneys general appeared to be pro-Establishment types who were looking to prevent him from rocking the boat, his current chief of staff, Mick Mulvaney, and his current attorney general, William Barr, seem more willing to help the president act on his instincts.
For example, with Mulvaney in charge of the White House, Trump has intensified the trade war with China, and Barr’s Department of Justice has launched a probe of large tech firms (reportedly including Amazon).
While some may view presidents as having tremendous amounts of power, the reality is that, for the most part, they cannot implement complex policies without the help of their staff. So now that the White House and DOJ are being led by people who are more loyal to the president, the odds of the government taking actions that will hurt Amazon has risen greatly.
If Trump is reelected, he will really be able to take the gloves off vis-a-vis Amazon.
So the odds of Amazon being broken up and/or having to pay more to the U.S. Postal Service have greatly risen since January 2019 and could increase even more in January 2021.
Reason to Sell Amazon Stock: Bezos Sold a Huge Amount of Stock
Perhaps seeing the writing on the wall in terms of increased competition, upcoming shipping problems, and government antagonism, Bezos sold $2.8 billion of Amazon stock from July 29 to Aug. 2. That is a tremendous amount of money, even for the world’s richest man.
Indeed, the proceeds from those transactions dwarf the amounts that Bezos previously received from selling AMZN stock, according to SEC data quoted by Quartz. Since 2008, the most money that Bezos previously obtained from selling stock in any one quarter was slightly more than $1 billion. And in 2017, Bezos said he planned to sell $1 billion of the stock annually.
Although, as the saying goes, there are many reasons people choose to sell a stock, (in Bezos’ case, his recent, pricey divorce, even by his standards, could be a factor), Bezos’ move should make Amazon shareholders nervous.
Reason to Sell Amazon Stock: Its Cloud Growth Is Slowing
Amazon’s cloud business, Amazon Web Services (AWS), has been responsible for much of the profit generated by Amazon.com Inc. Consequently, AWS’ success has to be viewed as a major reason why Amazon has broken out to such a huge extent over the past five years.
But signs are mounting that AWS may never become as dominant as some likely expected when they bought their shares.
AWS’ growth has slowed from 60% in 2015 to 37% last quarter, The Information reported. Some Amazon bulls may counter that the slowdown is a natural occurrence, given the law of large numbers, which says that the growth of anything has to slow once it becomes large enough .
But according to an eMarketer analyst quoted by siliconAngle, the extent of AWS’ slowdown last quarter was “unexpected,” while ““heightened competition from Microsoft (NASDAQ:MSFT) and Google could really crimp (Amazon’) high-margin (cloud) revenue stream over the next few quarters.” Sounds ominous for AMZN.
Also chiming in was CNBC, which confirmed that AWS’ Q2 revenue came in below expectations and said AWS’ slowdown indicates “that Microsoft is picking up steam.”
Reason to Sell Amazon Stock: Lack of New Initiatives
I can only think of two of Amazon’s many initiatives of the last five years that have definitely been successful: Alexa, and India, (the latter of which wasn’t profitable as of Q1). Online ads have been successful, but AMZN has actually sold them for many years.
Its other new projects that come to mind, from Whole Foods to drug sales to health insurance to drones, either haven’t amounted to much, have been a drag on the company’s bottom line, or have been a combination of both of the above. And the recent news that AMZN has more or less abandoned its China business isn’t too encouraging either.
The Bottom Line on Amazon Stock
Huge retailers and the Trump administration are working hard to trip up Amazon.com Inc, and there are signs that they will be successful. On the critical cloud front, AMZN appears to be losing ground.
Furthermore, the results of most of the company’s new initiatives have been lackluster or invisible, and FedEx’s departure could hurt its holiday-season performance.
Finally, if Bezos doesn’t seem to have much confidence in Amazon, why should anyone else? At this point, with a plethora of lucrative new technologies about to burst onto the scene and many extremely profitable, much safer companies with much more attractive valuations out there, there are many safer and more dynamic names in which to invest than Amazon stock.
As of this writing, the author did not own shares of any of the aforementioned companies.