Since hitting a low of $1,343.96 on Christmas Eve in 2018, Amazon (NASDAQ:AMZN) stock has been powering past all obstacles.
Even after a recent selloff, AMZN’s stock is up nearly 20% for 2019. One of the factors fueling this growth is its Amazon Marketplace. This online shopping network, which is separate from Amazon.com, allows third-party retailers to sell their branded products alongside Amazon’s offerings. The retailer gets access to Amazon’s customer base and Amazon can increase its offerings without adding inventory.
How significant is the Amazon Marketplace? In 2018, small businesses were responsible for 57% of Amazon’s physical gross merchandise. In fact, in his annual letter to shareholders, Amazon CEO Jeff Bezos remarked, “Third-party sellers are kicking our first-party butt.” However, it’s estimated that approximately half of the e-commerce giant’s nearly 1 million third-party sellers source goods from China. Therein lies the problem.
Third-Party Retailers Are Already Feeling the Pain
A recent report from Bloomberg cites that some Amazon sellers are being affected by the current tariffs. If the Trump administration makes good on its threat to increase tariffs on most Chinese goods by 10% on Sept. 1, 2019, many more retailers, who lack the negotiating power of large companies, will see increasingly high import costs.
This gives these retailers three unappetizing options:
- They can pass the cost along to consumers.
- They can eat the cost — and the accompanying profit.
- They can forego selling those particular goods — and lose the corresponding revenue.
Of these options, passing along the cost is the most likely route.
The Amazon Algorithm Makes It Hard to Raise Prices
However, passing along the cost to consumers is not a decision these retailers can take lightly. The retailers need to keep their products at a certain price to stay high on Amazon’s search rankings. A drop in rank puts them at risk of losing sales, and a lost sale means Amazon does not collect the associated commissions and fees.
Amazon has recently said it will compensate some retailers up to 10% to make up for the tariff. But this would only apply to sellers who buy products wholesale to sell on Amazon’s site. Other sellers will bear the cost or pass it along to the consumer, and that is why I think AMZN’s stock is likely to be a bit choppy for the rest of 2019. Many sellers are caught between a rock and a hard place as they try to figure out a holiday sales strategy that assumes the new tariffs that will be in place. Although Amazon is seeing strong growth in its subscription business which is helping diversify its revenue, it is first and foremost an e-commerce business. Shareholders anticipate a strong holiday season as part of assessing the company’s value.
Amazon Stock Is at Critical Support Levels
In recent weeks, Amazon stock went on a record eight-day losing streak that saw it drop over 10% after a slight earnings miss in EPS. The decline included a 6% drop alone in the week ending Aug. 2 when Jeff Bezos sold nearly $3 billion worth of the company’s stock.
But when we’re talking about a company that’s worth nearly $1 trillion, I’m not that worried about a 10% move. The stock broke its losing streak closing up just over 1% on Tuesday to close at $1,787.83.
However that’s not to say there’s no reason for at least a little concern. A look at common technical indicators suggests that analysts are taking notice of the potential headwinds that Amazon faces.
As of this writing, Amazon’s stock was crossing below 14 out of 17 common moving averages. Recently, Amazon dipped below its 200-day and 320-day moving averages after spending the better part of two quarters above the trend line.
If you’re buying Amazon stock, be aware of these potential long-term challenges.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
