In the mega-cap tech group, one stock that has looked surprisingly weak in 2019 is the once unstoppable growth titan Amazon (NASDAQ:AMZN). Simply consider the following facts about Amazon stock:
- AMZN stock is up only 17% year-to-date, versus a 19% gain for the S&P 500. Peer large-cap tech stocks Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT) are both up around 40% year-to-date.
- Amazon stock has consistently traded below its Street low price target for the past year, an unusually bearish sign that emerges only when investors are having doubts about a stock.
- Amazon stock hasn’t made new highs in 2019. The all time high for AMZN stock remains the 2,050 mark it hit back in September 2018.
- The 200 Day Moving Average has gone flat, and has been flat for the past year.
In other words, the trading action on Amazon stock has been bad for the past year, and shows signs that the best of the multi-year Amazon stock rally may be over.
I don’t buy that thesis. Sure, the trading action is weak today for a few very legitimate reasons. But the trading action won’t remain weak forever. Zooming out, the big picture here remains favorable, and Amazon continues to project as a big revenue grower over the next several years with significant upside margin drivers.
As such, I’d be interested in taking advantage of recent weakness in Amazon stock. It won’t last forever. It will pass. Once it does, the stock will resume its secular march higher.
Why Amazon Stock Has Been Weak
Amazon stock has been weak over the past the year for a few reasons. Most of them center around slowing revenue growth and ballooning expenses.
The big-picture bull thesis on Amazon is that the company disrupted the entire retail world with technology, was going to run at slim margins to rapidly gain market share in the commerce world, and then — after they established dominance in retail — expand margins on a huge revenue base to produce huge profits, which theoretically, would produce a big AMZN stock price.
Over the past year, that thesis has been challenged by one thing — competition. Amazon doesn’t have a choke-hold over the e-commerce world like many thought it did. As it turns out, Walmart (NYSE:WMT) and Target (NYSE:TGT) aren’t dinosaurs. They’ve adapted to this new wave of commerce, building out robust digital channels and expanding omni-channel capabilities. In so doing, they have become legitimate Amazon competitors.
The increased competition has lead to slowing growth in Amazon’s core commerce business. It has also led to ballooning fulfillment expenses, since in order to fight off this competition, Amazon has been rolling out free one-day shipping to win over customers. The result? Revenue growth has slowed, margin expansion has slowed, and profit growth has slowed. As profit growth has slowed, AMZN stock has fallen flat.
To make matters worse, there are sizable antitrust risks on the horizon, rumors have been swirling that Amazon is unfairly promoting its products over third-party products to boost profits, and the streaming TV landscape has also become saturated with competitors. Those are all optics risks which do not help investors believe that the growth narrative will get back on track any time soon.
Why It Won’t Be Weak Forever
Amazon stock has been weak for the past year for very legitimate reasons. The company’s core commerce business is slowing due to competition. That increased competition is simultaneously weighing on margins, so profit growth has taken a double hit. This double hit has resulted in a weak stock.
That all makes sense. But it also makes sense that this weakness in AMZN stock won’t last forever.
Consider this. Just as Apple (NASDAQ:AAPL) is becoming less reliant on the iPhone by building out a software business (yet still dominates the smartphone market), Amazon is becoming less reliant on its e-commerce business by building out other growth verticals (yet still dominates the e-commerce market).
E-commerce is the big story at Amazon. Today. But Amazon also operates a high-margin and very big infrastructure cloud business growing at a 30%-plus rate. They also operate a rapidly scaling and very high-margin digital ad business that has a long runway ahead of it. There’s the offline retail business which has tremendous potential thanks to Amazon’s new cashier-less technology and huge Prime sub base. There’s also the logistics business, the pharmaceutical business, and the video game streaming business with Twitch.
In other words, Amazon is one part e-commerce, and whole bunch of parts “other stuff”. Sure, that “other stuff” doesn’t comprise a big piece of the pie today. But all that “other stuff” is growing more quickly than the e-commerce business, and most of those businesses run at higher margins than the e-commerce business, too. Thus, as those businesses scale over the next several years, their growth should be additive to Amazon’s margin profile and profit growth trajectory.
At the same time, Amazon should retain mostly dominant control of the e-commerce market because of their sticky ecosystem of 100 million-plus Prime subs.
Bottom Line on AMZN Stock
In the big picture, AMZN stock will be just fine. Sure, the e-commerce business may continue to slow. But it will remain a growth business for a lot longer because Amazon will consistently leverage its huge, sticky user base to retain dominant control in the secular growth e-commerce market.
At the same, Amazon’s other businesses will continue to ramp with great pace — and as they do, many of them will provide upside drivers for the company’s overall margin profile.
Thus, while Amazon’s profit growth has slowed over the past year, it won’t slow forever. Instead, profit growth rates should re-accelerate over the medium term thanks to cloud and digital ad ramp. As they do, AMZN stock should regain its winning stride.
As of this writing, Luke Lango was long AMZN and FB.
